By Kevin Wilcox
The nonresidential and institutional sectors began to recover significantly in 2015, and economists project strong growth to continue into next year.
Between September 2014 and September 2015, nonresidential construction rose 12.4 percent, and economists predict additional increases in 2016.
November 10, 2015—Civil engineers looking for more robust business conditions have the greatest cause for optimism since the beginning of the Great Recession, according to the 2016 forecasts of economists who study the construction industry. Projections indicate that the nonresidential sectors of the construction industry—which include many projects that require civil engineers—are finally staging a significant recovery.
Between September 2014 and September 2015, nonresidential construction rose 12.4 percent, according to Anirban Basu, the chief economist for the Associated Builders and Contractors (ABC), who was one of three economists speaking at a November 3 Web conference sponsored by ABC, the National Association of Home Builders (NAHB), and the American Institute of Architects (AIA), all headquartered in Washington, D.C., earlier this month. Economists from the three groups shared their forecasts for 2016 at the conference.
A 12.4 increased, Basu said, is "not bad for an economy that is growing around 2 to 2.5 percent [overall].
"I'm expecting a 7.4 percent expansion in nonresidential construction spending next year," he added.
Moreover, Basu noted that a major source of that growth will be the beleaguered public sector, which includes many of the water, transportation, and education projects that employ civil engineers. "One of the things really driving the 7.4 percent growth figure....is the public sector coming back. State and local government finances are continuing to improve," he said. "We're seeing some improvement in some of the categories most associated with public funding, such as sewage and waste disposal, education, transportation, highways and streets, and water supply. My very strong sense is that this progress at the state and local government level continues."
This growth, however, comes after an exceptionally steep decline. "Between October 2008 and January 2011, nonresidential construction spending in our country dipped 29.6 percent," Basu noted. "Is it back fully? Well, we know it's not."
Kermit Baker, Ph.D., the chief economist for the AIA, agreed. "Nonresidential building activity has seen some strong numbers recently," he said. "It's not back to where it was at the peak in 2008, but certainly getting closer."
Baker noted that some types of construction are recovering more slowly than others. "The commercial/industrial sector saw a deeper downturn during this cycle and it's a little bit closer to recovery now," he said. "The institutional sector [recovery] is really just getting under way."
Baker noted that the AIA's architecture billings index has been in positive territory for much of the past two years, albeit with periods of volatility. AIA research has shown that the billings index, which reflects self-reported design activity at architecture firms, is a leading indicator for the construction industry, with engineering firms and contractors experiencing a corresponding increase in business nine months to one year later.
"The ABI has seen some of the stronger scores...since before the last downturn, suggesting that we should see healthy growth in the quarters and years ahead," Baker noted. "Institutional sectors are just beginning to build momentum. So we expect these growth rates to increase …to build on some of the momentum that we've seen throughout 2015."
Baker expects nonresidential construction to be up 8.2 percent in 2016. His forecast projects strong continued growth in the office and retail segments, and that activity will finally pick up significantly in the health care and education segments.
The economist discussed the larger societal and economic trends that are currently influencing the construction sectors of the economy. David Crowe, Ph.D., the chief economist for the NAHB, noted that an improving employment picture has finally prompted growth in household formation among the 91 million members of the millennial generation.
Crowe noted that the inventory of existing homes for sale in the market has shown sharp cyclical trends, dipping below average in winter months. At the same time, homebuyers are showing a marked preference for existing homes when compared to the years prior to the recession. This has created some supply issues as demand has increased. If this trend continues to spur growth in new home building, demand for such public services as sewer, water, and transportation infrastructure may soon follow.
In fact, the construction industry has been recovering so well that labor shortages are becoming an increasing concern. Basu noted that the industry added 205,000 net new jobs between September 2014 and September 2015. However, those jobs currently carry a much smaller wage premium than they once did and are less attractive to people in the labor market. "Labor...has become a huge issue for the entire construction industry, largely because the construction labor force declined dramatically during the downturn, as many left the industry because they couldn't find work," said Baker. He sees this challenge as an opportunity for the industry to recruit from traditionally underrepresented groups to rebuild its labor force.
Sharp declines in energy prices have bolstered the construction recovery in 2015 and those trends are likely to continue into 2016, Basu added. "One of the most interesting aspects of economic life has been in decline in construction materials prices over the last year, …down more than 5 percent on a year-over-year basis, according to the Bureau of Labor Statistics," Basu noted. "All things being equal, this should [work] to the benefit of margins and construction firm profitability.
"In 2015 we are dealing with oil prices that have collapsed, natural gas prices that have collapsed, copper prices that have collapsed, iron and steel prices that have collapsed, and as a result my guess is that in 2015...many contractors are [not] worried about materials prices," he added.
On the AIA website announcing its forecast, Baker expresses true optimism for the first time in many years. "Spending on nonresidential building should total close to $360 billion this year, approaching $390 billion in 2016," Baker writes. "That still would leave the industry more than 10 percent below its most recent high in 2008. However, if these forecasts are achieved, spending on nonresidential building would have increased over 25 percent between 2013 and 2016, putting the industry tantalizingly close to a full recovery from this past downturn."