Industry Looks at the Future Construction Economy and Likes What It Sees
Looking to the Future: ISA and ICR Invite Economists to Discuss the Outlook of the Construction Industry
Two leading construction organizations – the Indiana Subcontractors Association (ISA) and the Indiana Construction Roundtable (ICR) – invited economists to peer into the immediate future of construction economic activity in separate meetings they recently. Their messages were generally good for the industry with some segments merely slowing in growth while others are expected to continue to expand at marginally higher rates.
The major problem for every segment of the industry will continue to be the shortage of workers, which is expected to be unrelenting.
Brian Tonry spoke at the ISA event. He is the Vice President of Network Intel and Analytics for BlueBook, a national network that tracks the activities of hundreds of thousands of general contracotrs and subcontractors.
Among those presenting at ICR was Keven McCook of FMI, a consulting group focusing on engineering and construction, infrastructure, and the built environment. FMI has a decades-long history of helping ICR member companies understand and take advantage of trends and developments in the industry.
Both presenters are forecasting a slower growth in construction starts than in recent years.
Tonry said, “Over the past three years, the expansion for the U.S. construction industry has shown deceleration in its rate of growth, a pattern that typically takes place as an expansion matures.”
McCook similarly said, “What we are seeing is that growth is slowing…it is now in single digits.”
The total of all construction spending is forecast to have increased 6 percent in 2018 and an additional 1.5 percent increase in 2019.
There was little doubt among any of the presenters that if the federal government could come to terms on infrastructure spending, the growth in non-residential construction would rise much higher.
The Possibility of a Recession
Both also noted that the current economic expansion in the U.S. is nearing 10 years, which, if it continues into June, will be the longest expansion for the nation since pre-world war times. It is reasonable, they said, to expect that the expansion cannot continue much longer, though it certainly appears steady into 2021.
On the slightly down side, the tax cuts in 2017 helped to strengthen business investment and created some jobs, but they don’t expect this to provide prolonged growth. The stimulus that bolstered the numbers in 2018 will not exist in 2019 and beyond.
Tonry was confident about the possibility of a recession in “2021ish” and said “it should be more of a slowdown versus an actual turndown.”
He also noted that Christopher Barraud, Paris-based Chief Economist for Market Securities, pushes a possible U.S. recession into 2021 or beyond.
McCook listed some of developments in the future that could alter the generally rosy future and lead to a more robust recession. These included:
- Major domestic or European terror event
- Rising energy prices
- Premature or over reaction by the Federal Reserve
- Commercial real estate bubble
- Another European debt crisis
No End in Sight for Workforce Shortage
Not surprising to any of the contractors or design professionals in the meetings was the forecasted continuation, and even worsening, of the workforce shortage.
“I think it is safe to say that there is zero likelihood that the construction industry will be able to regain the more than 1.2 million people lost over the past 15 years. To do that, we would have to hire at least one out of every six people who are looking for a job,” said McCook.
The shortage of workers is also exacerbated by the government’s new immigration policies that result in fewer available workers that otherwise would offer some limited relief.
Faced with the lowest unemployment rate in 50 years, Tonry said that, “wages are going up and your employees will see opportunities outside of your firm so you might want to prepare for that.”
The retirement of current employees and the resulting loss of institutional knowledge is expected to continue and get worse and McCook said, “most firms are rarely implementing learning tools such as formal and informal mentoring, individual coaching or providing ongoing feedback, methods that are critical for developing high potential people.”
Outlook for Construction Sectors
While the overall strength of the construction economy is good, the degree of growth is expected to vary widely among its various sectors.
Both speakers agreed that multi-family housing would not perform as well as it has recently.
Sales among multi-family housing units saw a brief revival in 2018 with unit sales growing at a 2 percent clip. However, that direction is expected to change with an 8 percent drop forecasted for 2019. The drop, they said, may be due to rising rental rates along with increasing interest in single-family properties among Millennials.
While both agreed that the religious sector was tempering, they differed on their expectations for the health care sector. McCook saw it “softening” too while Tonry said, “with 28 percent of the U.S. population now over the age of 55, this growing demographic should portend well for healthcare construction.”
The difference between the two may be explained by continuing challenges to the Affordable Care Act by both Congress and the Courts. These challenges add volatility to the healthcare sector. As with infrastructure spending, the government’s actions or inactions will largely determine the eventual growth pattern of the healthcare sector.
Another major sector whose future will be determined by government policies that are now murky is manufacturing. According to Tonry, “Dampers of growth are lurking, however, such as rising interest rates and subsequent financing costs. Tariff hikes and a trade war with China could constrain this sector in 2019 and 2020 if exports flatten or decline.”
Tonry also noted that new store construction will continue to disappoint even with a strong economy and hearty consumer spending and that “warehouse construction may finally be maturing as well. Warehouse numbers are starting to peter out.”
The “villain” for store construction is technology and may threaten other sectors, such as hotels that are now competing with the likes of Airbnb, and groceries competing with Netgrocer.
Infrastructure Stays Steady
Infrastructure spending continues to be a hot market. The 2018 omnibus allotted $8.7 billion for transportation, including a $3.5 billion increase for highways and bridges. State and local government funding is also supporting the sector, such as a rise in gasoline taxes, approved in 27 states since 2013.
McCook expects that highway and street construction will be the fastest area of growth in Indiana through 2022 followed by non-building construction.
While the Hoosier State’s construction economy will continue to grow, the mid-Atlantic States, Pacific Coastal area and the South Atlantic area will be hotter. Indianapolis is low (38th) in a list of cities that McCook said are being viewed as leading cities for investment and development. Topping the list were Seattle, Austin, Salt Lake City, Raleigh, Dallas, Fort Lauderdale, Los Angeles, San Jose, Nashville, and Boston.