The extreme economic swings of the past year will stabilize in 2021, but some construction sectors will suffer major declines in the number and value of projects started, according to a new economic forecast released by Dodge Data & Analytics, a market research firm headquartered in Hamilton, New Jersey. The firm’s report, the 2021 Dodge Construction Outlook, slaps a 14 percent decline in overall construction starts in dollar value for 2020 but predicts an increase of 4 percent for 2021. This expected growth is on track to equal 2018 and 2019 rates, although at lower spending levels; just $771 billion for 2021 compared with $853 billion in 2019.
The firm cautions that a full economic recovery to pre-COVID-19 levels hinges on finding a vaccine and passage of another federal stimulus to bail out local and state governments hit hard economically in fiscal 2021 because of the downturn in revenues generated from local taxes.
“Without additional support, state and local governments risk further cuts, and that would darken the outlook for infrastructure spending going forward,” says Cristian deRitis, Ph.D., the deputy chief economist for Moody’s Analytics, in New York City, who helped announce the release of the 2021 Dodge Construction Outlook on Nov. 10. For the most part, states will come into 2021 better off financially than they did in 2009 during the last recession, deRitis says.“States will be able to manage their finances, but they won’t have much room left in order to finance infrastructure projects,” he adds.
Although Congress considered passing a large infrastructure stimulus package earlier in the year, the recent national election appeared to temper any political momentum for a spending package. Because the election could result in a split Congress — a Democratic House of Representatives and a possible Republican Senate, pending the results of January runoffs in Georgia — both Richard Branch, the chief economist at Dodge Data & Analytics, and deRitis expect any additional economic stimulus packages to be funded at a much lower amount than previously discussed. “We are unlikely to see any broad or sweeping legislative actions over the next couple of years,” Branch adds.
However, the need for infrastructure spending remains “very high,” deRitis says. “As a percentage of (gross domestic product), infrastructure spending in the United States remains depressed.” In fact, it has remained below 2 percent of GDP since 1980, except for a slight uptick when Congress passed the $831 billion American Recovery and Reinvestment Act of 2009 to help the nation recover from the previous recession.
The recent election provided some good news for the construction industry at the local and state levels, according to Branch. Voters approved more than $34 billion in bonds for construction projects in contrast to the $13 billion in referendums for construction projects that they failed to pass. Many of those measures that voters approved were for new school construction or renovation.
Because of the lack of a large economic stimulus package focused on infrastructure this year and uncertainty about the timing of a vaccine for COVID-19, the recovery next year will be uneven, according to the report. “I think for every couple steps forward, we will take a step back,” Branch says, adding that the value of construction starts by the fourth quarter of 2021 will still be 8 percent shy of 2019 pre-pandemic levels. “The road to recovery is long and will be fraught with potholes,” he says.
The pandemic and ensuing economic downturn have negatively influenced some construction sectors more than others. According to the Dodge report, the commercial building sector will suffer a 23 percent decline in starts this year but will rebound to a 5 percent gain, led by growth in warehouse starts fueled by the online purchasing bonanza that continues to occur during the pandemic. Institutional building, which includes schools, hospitals, sports arenas, and airline terminals, also was hit hard and will suffer a 17 percent decline this year with no growth expected in the coming year, according to the report.
The only construction sector that will experience growth this year is single-family housing, which is up a surprising 4 percent this year, primarily due to low interest rates and perhaps an ongoing population shift from urban to suburban areas as a result of the pandemic, according to Branch. The report expects single-family housing to remain strong in 2021, growing another 6 percent.
Another notable sector that could vary widely in future economic reports is highway and bridge construction. Branch says that there were unsteady gains over the last several years in the sector, including a dip in 2019, but a 1 percent gain is expected in 2020 despite the recession. For now, Branch predicts another 1 percent gain in the sector in 2021, but it will depend on the reauthorization of the now expired $305-billion, five-year Fixing America’s Surface Transportation Act.
Congress has since extended annual FAST Act funding through a continuing resolution and will not have to address full reauthorization until September 2021. Any packages passed after that would not be realized in economic reports until the fourth quarter of next year, Branch says. “Though it would certainly boost levels from there out,” he adds.
Dodge predicts that hotels, education, and recreation construction starts will continue to decline next year, while commercial warehouse, health care, and single-family housing will see the largest gains but not without some help. “The economy has noticeably slowed over the past several months,” Branch says. “We see that slow growth continuing through the fourth quarter and quite frankly into the first three months of 2021.”
The stagnant economy appears to be waiting for an accelerant to move forward. “We demarcate growth into two phases,” says deRitis. The first is a pre-vaccine recovery phase, where the economy will continue to grow slowly because there will still be caution among consumers and businesses, he says. The economy will struggle for a quarter or two in 2021, he adds, but you can expect to see accelerated growth in the second phase once a vaccine is widely distributed.