The Economist’s Outlook for 2020

Throughout the last quarter of 2019, industry economists let loose their predictions about the approaching conditions of the 2020 United States construction market. The “Will they? Won’t they?” nature of some of 2019’s early forecasts left many of us pondering the somewhat vague indicators and inconclusive commentary—some of which suggested the possibility of a recession.

As we embark upon the new year and head together into economic uncertainty, CBO is here to help clear the air with a summary of three major economic forecasts from construction’s top industry analysts.

1. Anirban Basu

Chairman & Ceo – Sage Policy Group Inc.

Chief Economist – Associated Builders & Contractors (ABC)

Chief Economic Advisor – Construction Financial Management Association (CFMA)

Anirban Basu holds several positions in economic forecasting for the construction industry. He is widely regarded for his accuracy and clever, cheeky delivery. In 2020, Basu remains cautiously optimistic. At print time, in his most recent forecast for CFMA, he recommended a “wait-and-see” approach.

He suggests that much of the negativity reflected in earlier forecasts and in financial market volatility often relates to things people believe will happen; not necessarily what will happen. He stressed a potential slowing of the economy and echoed the words of Former Federal Reserve Chair Janet Yellen: “There is always some chance of recession in any year. But the evidence suggests that expansions don’t die of old age.”

In his forecast for ABC, Basu reported that leading indicators like ABC’s Construction Backlog Indicator reflected a steady increase throughout late 2019, while lagging indicators, including construction spending and employment, had softened. With spending in private nonresidential categories, such as office and logging, on the downslope, public spending categories remained positive.

In his work for ABC, Basu said, “Indeed, one of the sources of strength for the U.S. economy over the last year has been a pickup in infrastructure spending. While the federal government has yet to fashion a full-fledged infrastructure plan for the nation, and the Highway Trust Fund is set for insolvency by 2021 absent congressional action, infrastructure-related outlays remain a good news story. So far, state and local governments have come to the rescue, supported by rising collections of income, sales and property taxes. Several key construction segments have benefited as a result, including water/sewer, transportation and highway/street.”

Basu said that, ultimately, the heightened level of uncertainty in some areas could induce many economic actors to adopt a “wait-and-see” attitude, further reducing economic activity in the context of an already rapidly softening global economic environment. However, he said, there still remains momentum in construction.

Basu noted that important parts of the U.S. economy continue to perform well (consumer markets, corporate earnings, construction), and, while construction itself is still seeing the effects of the labor shortage, we are advised to keep an eye on conditions in late 2020 and currently developing situations, such as the U.S. trade deal with China, an infrastructure spending plan, steel and aluminum tariffs, and continued accommodations from the Federal Reserve System. One more key source of uncertainty: next year’s presidential election.

At print time, President Trump was in the process of undergoing an impeachment trial. For more economic insights, follow Basu on Twitter @sageanirban.

2. RICHARD BRANCH

Chief Economist – Dodge Data & Analytics

With 20 years of experience as an economic forecaster, Richard Branch was appointed chief economist at Dodge in late 2019. Branch has been with Dodge for over 10 years, previously as senior economist. Every year, the company releases its Dodge Construction Outlook, which in 2020 predicts that total U.S. construction starts will slip to $776 billion in 2020, a decline of 4% from the 2019 estimated level of activity. “The recovery in construction starts that began during 2010 in the aftermath of the Great Recession is coming to an end,” said Branch.

He offered our readers two major takeaways from the 2020 report:

1. “Even though we are calling for a decline in construction starts in 2020, this downturn will be very mild by comparison to the Great Recession.”
2. “There will still be lots of opportunity to grow your business next year. It might be in a different market or geographic area … but there will be opportunity.”

According to the report, easing economic growth driven by mounting trade tensions and lack of skilled labor will lead to a broad-based—but orderly—pullback in construction starts in 2020. “After increasing 3% in 2018, construction starts dipped an estimated 1% in 2019 and will fall 4% in 2020,” he said.

Branch was clear in mentioning this specific piece of insight along with his outlook: 2020 will not be a repeat of the Great Recession. Economic growth is slowing but is not anticipated to contract next year. That said, he predicts that construction starts will decline, but the level of activity will remain close to recent highs.

“By major construction sector, the dollar value of starts for residential buildings will be down 6%, while starts for both nonresidential buildings and nonbuilding construction will drop 3%,” Branch said. With the gentle reminder that, while the downturn is expected to be mild (certainly when compared to Great Recession), he predicts that the industry could begin to see the seeds of growth sprout in 2021—particularly, on the residential side of the market. To purchase the report, call 800-591-4462 or visit construction.com/analytics-store/2019-dodge-construction-outlook.html.

3. Ken Simonson

Chief Economist – Associated General Contractors of America (AGC)

Ken Simonson has more than 35 years of experience analyzing, advocating and communicating about economic and tax issues, including 10 years as chief economist for AGC. In late 2019, Simonson reported declines in construction spending that were expected to cause project delays and cancellations. According to federal spending data, decreases in private nonresidential, multifamily and public projects had outweighed a recent revival in single-family homebuilding.

Simonson and AGC have since spoken out to bring awareness to the impact of trade conflicts in harming private construction. “A drop in mortgage interest rates has given a boost to single-family homebuilding in recent months, but these gains have been offset by weak private nonresidential spending as trade friction drags down U.S. economic growth,” said Simonson. According to AGC officials, “Private nonresidential investment has weakened over the past year, as trade disputes and uncertainty over future trade policy have had a negative impact on a variety of agricultural, manufacturing, distribution and transportation businesses.”

AGC has urged the Trump administration to settle disputes promptly, noting that construction firms are at risk of getting caught in the trade-war crossfire. Until the government removes tariffs and reopen markets to U.S. exports, AGC suggests that private nonresidential construction will suffer.

4. Kermit Baker

Chief Economist – The American Institute of Architects (AIA)

For the past 24 years, Kermit Baker, Ph.D., Hon. AIA, has worked with the AIA to calculate and share his monthly evaluations of the Architecture Billings Index and Annual Value of Construction Put in Place. Although having previously reported declines in billings and some market volatility in the design sector, Baker said, “Although ongoing uncertainty over the direction of economic growth persists, a strong stock market and growing payrolls at U.S. businesses continue to generate more construction projects. With most regional and sector billing scores at architecture firms improving from the previous months, we’re seeing a bit of a rebound from disappointing levels of design activity in recent months.”

5. Michelle Meisels

Principal – Deloitte Technology Practice

Leader – Deloitte Engineering & Construction Practice

With over 20 years of IT consulting experience, Michelle Meisels is a principal in Deloitte’s technology practice and leads Deloitte’s engineering and construction practice. For 2020, Meisels reports that prospects for engineering and construction (E&C) firms remain upbeat after having a robust 2019.

“E&C firms have been positioned as active participants in building the smart, connected future. Overall market growth is expected to continue through 2019 as construction spending follows the overall GDP growth rate. While firm revenues are steadily rising, the bottom lines are still under considerable pressure.” Meisels points to industry challenges including sustained cost pressures, ongoing labor shortages and trends toward fixed-bid projects.

“While the industry still trails broader digital adoption maturity, the continued adoption of digital technologies could alleviate some of these issues. It can also present additional hurdles in terms of successful implementations and upskilling the workforce to absorb the technologies,” said Meisels.