3 economist predictions for construction industry growth in 2016

It's the season of construction economic predictions, and a week after Dodge Data & Analytics released its 2016 Dodge Construction Outlook, the Associated Builders and Contractors hosted a webinar with top economists from major construction associations offering their own forecasts for the coming year. 

Similar to Dodge economists, ABC Chief Economist Anirban Basu, American Institute of Architects Chief Economist Kermit Baker and National Association of Home Builders Chief Economist David Crowe predicted continued industry growth in 2016.

ABC Chief Economist Anirban Basu

Anirban Basu
 

Basu predicted 7.4% growth in nonresidential construction spending next year. He said the industry is seeing strong momentum that will carry into 2016. The main problem now for construction companies is driven not by a lack of demand, but by difficulty meeting that demand. With a lack of available workers, supply constraints are the most significant obstacle still hindering stronger growth, according to Basu.

"The construction industry has benefited from increased stability stemming from low materials prices and greater certainty regarding federal budgeting and monetary policy, although a lack of appropriately skilled labor will remain a challenge for contractors," he said.

Basu added that the Federal Reserve's interest rate decisions will have a major impact on the construction industry and economy as a whole. "The four segments that are driving the economy forward  consumer spending, auto, residential and nonresidential construction — are largely oriented around low interest rates, and the Federal Reserve knows it. Takeaway these ultra-low interest rates and the U.S. economy has a problem."

Basu added: "Next year overall should be a solid year for nonresidential construction spending. One of the leading indicators is the Architectural Billings Index. Architects are getting busier, which means contractors generally get busier downstream."

Associated Builders and Contractors
 

AIA Chief Economist Kermit Baker

Kermit Baker
 

Baker said he expects significant growth in the single-family sector due to pent-up demand after years of slower activity. The multifamily and home-improvement segments have already recovered almost fully after the major downturn during the recession and are now "entering an expansionary stage." Nonresidential building has seen steady growth and is getting closer to reaching its pre-recession peak. 

"Led by tremendous demand for energy-efficient spaces, spending on home improvements is on track to reach an all-time high by year's end," Baker said. "The office and retail sectors are expected to lead the commercial real estate market in 2016 with near double-digit increases in construction spending expected."

Baker pointed to recent growth in existing-home sales and home improvement sector gains as signs the residential industry is starting to get out of "this little lull we've been in for a few quarters."

However, Baker cautioned that labor concerns continue to plague the industry. Construction has typically relied on immigrants and students from vocational and technical training programs. But with the decline in immigrant workers and a lack of young people choosing technical training, Baker encouraged the industry to "focus on the key demographics that have traditionally not served this market," especially women in the workforce.

American Institute of Architects
 

 

NAHB Chief Economist David Crowe

David Crowe
 

Crowe expressed optimism for the residential construction industry in 2016, largely due to an improving job market. He pointed to the strong correlation between single-family permits employment gains. But despite the recent improvements in the U.S. economy, Crowe said, "We aren't quite up to where we need to be. We still have a little further to go to have full employment."

Crowe said the supply side of the industry is still dealing with major obstacles, especially access to qualified labor and availability of buildable lots. He added that the labor shortage is continuing largely due to the fact that construction wages are less competitive than before the recession. "In 1990, the typical residential worker made 14% more than general wage rate. What's disturbing now is that ratio is down to 4% more. The competitive level is not as good as it was. Unfortunately, that means one of the solutions to the labor shortage is to raise wages," he said.

National Association of Home Builders
 

Crowe expects the U.S. economy to keep growing next year, as well as mortgage rates to stay at record lows — even if short-term interest rates rise slightly. He said he has a "reasonably optimistic view of single-family construction" and expects 2015 to be about 11% stronger than 2014. Next year should see even greater gains for the residential industry. Single-family construction, according to Crowe, is currently 53% back to what is considered "normal" levels, and should be 91% of the way there by the end of 2017. Multifamily, on the other hand, is already significantly higher than "normal" levels, currently 32% above the mark. The sector is expected to slowdown in the next two years, coming in 9% higher than "normal" levels at the end of 2017.

National Association of Home Builders
 
National Association of Home Builders
 

 

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