The Source Civil Engineering Magazine AEC industry shows signs of slow but steady recovery
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AEC industry shows signs of slow but steady recovery

By Brian Fortner

As of late August, early third-quarter economic data and consumer confidence indexes were heading in the right direction as the architecture, engineering, and construction market segment began to pull out of a relatively short but substantial recession, according to AEC industry economists. After COVID-19 shutdowns and stay-at-home orders in many areas of the country in the second quarter of 2020, the deep trough in the economy was beginning to rebound, experts reported. Many economists predicted that while the worst may be over, the actual recovery would be slower than expected.

“The economy has certainly moved off the bottom, and it is trending in the right direction,” says Richard Branch, the chief economist at Dodge Data & Analytics. Branch addressed the state of the AEC industry in a webinar held in early August titled “COVID-19 Update: From Recession to Recovery.” 

U.S. TOTAL CONSTRUCTION STARTS. (Graph by Dodge Data & Analytics)

Branch and his team at Dodge predict a 17 percent increase in gross domestic product for the third quarter of 2020 versus a decline of nearly 33 percent in GDP seen in the second quarter this year — the steepest decline in quarterly GDP since the U.S. government began keeping track in 1947. The GDP is predicted to flatten in the fourth quarter, however, with only a 1 percent gain, leaving GDP down nearly 6 percent for the year. 

Many analysts predicted a rapid increase in third-quarter GDP and had hoped for a V-shaped economic recovery, meaning one in which the economy tanks quickly but rebounds just as fast to prerecession levels. Instead, more recent data suggest a slower recovery, resembling a square-root sign, may be more realistic as the number of COVID-19 cases continues to increase and new regional hot spots appear. After the uptick in the third quarter, “we expect economic growth to move sideways until mid-2021,” Branch says. 

More than 1 million construction industry jobs were lost in March and April, but by the end of the June, 611,000 of those jobs had been added back.

The Construction Industry Round Table’s third-quarter Sentiment Index, a quarterly survey of roughly 120 leading industry executive members, increased from a historic low of 21.6 in the second quarter to 52.1 — a record quarterly increase. The survey measures market trends and overall business sentiment on a scale of 1 to 100, with 50 being neutral. The group’s similar Design Index, however, remains just below 50, which would indicate fewer construction opportunities in the future. 

Still, there is room for optimism. According to Branch, more than 1 million construction industry jobs were lost in March and April, but by the end of the June, 611,000 of those jobs had been added back. “We are a little over halfway back to where construction jobs were in February,” Branch says. “The foundation of the recovery is built. As long as businesses are able to remain open, the economy should continue to move forward.”

Regional data, on the other hand, seem a bit more daunting and could throw the recovery back into a tailspin. During the early part of the pandemic, the Northeast was hit the hardest and shut down nearly all businesses and construction activity. As the Northeast began to recover, the U.S. experienced spikes in COVID-19 cases and deaths across the Southeast and in some states in the West, particularly California and Texas.

Although the overall data seem positive, it will take time to recover from the massive losses in the second quarter.

That is particularly discouraging because all construction markets are not equal. The Mid-Atlantic and New England areas account for about 14 percent of total U.S. construction, Branch says. But the South Atlantic, Texas, Arizona, Nevada, and California — places where COVID-19 was hitting hard in July and August — account for 45 percent of the total. If these states go on lockdown, the construction industry will surely suffer. However, as the economy posts modest rates of growth, there are enough projects in the pipeline to keep the construction industry moving forward, Branch says.

Although the overall data seem positive, it will take time to recover from the massive losses in the second quarter. Of the 22 construction categories tracked by Dodge, only two — warehouses, and highways and bridges — are expected to show increases in 2020, according to Branch. Both categories are expected to experience modest 2 percent growth this year, with somewhat better numbers in 2021, at 8 percent and 6 percent, respectively. 

Overall, commercial construction starts are expected to fall by 21 percent this year and recover only slightly in 2021, with a 6 percent gain overall. Manufacturing starts will decrease by 43 percent, and institutional construction starts will fall by 14 percent. Each will see only a 2 percent gain in starts in 2021, according to Dodge. Total construction starts will fall 15 percent this year and rise a modest 5 percent in 2021. “The economy won’t fully recover until people are not afraid to go out and a vaccine is widely adopted,” Branch says. 

Without federal assistance, Branch says, state and local governments would need to cut $500 billion from their budgets for this fiscal year.

The slow, modest recovery is partially being driven by state and local budget cuts. Most state governments began their fiscal year in July, and the effects of COVID-19 on state budgets has been dramatic. Significant losses of sales and income tax revenue at the state level will hamper future construction projects. Without federal assistance, Branch says, state and local governments would need to cut $500 billion from their budgets for this fiscal year.

Before year’s end, the federal government is expected to address at least two large funding packages that could significantly enhance construction opportunities in the next year. The five-year Fixing America’s Surface Transportation Act expires in September and is expected to be replaced with a package that totals at least $300 billion over the next five years for transportation infrastructure. Many economists, however, predict temporary funding measures until Congress can fully address the larger reauthorization, possibly after the November elections. 

In contrast, most economists are also hoping for a 2020 reauthorization of the Water Resources Development Act, which has seen bipartisan support in the House and Senate and could provide as much as $20 billion to water projects over the next two years. (Read “House Passes $10 Billion Water Resources Development Act, Focus Turns to Senate,” Civil Engineering, September 2020, pages 12-13.)

This article first appeared in the October 2020 issue of Civil Engineering.                                                       

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