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Forecasts Turn More Optimistic but Risks Remain

BY KEN SIMONSON, CHIEF ECONOMIST
AGC OF AMERICA

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Indications are mounting that nonresidential construction activity will soon pick up, although there has been little improvement so far. But a host of threats make the timing and extent of a turnaround uncertain.

There was little sign of recovery through the first half of 2020. By June, employment at nonresidential construction firms had edged up only 1% from June 2020 and remained almost 300,000 workers, or 6.2%, below the pre-pandemic high reached in February 2020. Employment topped February 2020 levels in only 11 states. Nonresidential construction spending in the first five months of 2021 trailed the January-May 2020 total by nearly 9%, with decreases in all but one of the 16 categories the Census Bureau reports on.

Nevertheless, there are signs that most nonresidential segments will reverse recent losses in 2022, if not sooner. Two such signals come from monthly reports.

The Architecture Billings Index measures the share of architecture firms that report their billings increased in the latest month compared to the share whose billings declined from the month before. The American Institute of Architects (AIA), which compiles the index, says that it correlates well with construction spending nine to 12 months later. After hitting the lowest reading in its 26-year history in 2020, the index has been strongly positive since March, suggesting an upturn in building construction by early 2022.

The Dodge Momentum Index “is a monthly measure of the first (or initial) report for nonresidential building projects in planning, which have been shown to lead construction spending for nonresidential buildings by a full year,” according to Dodge Data & Analytics. The company reported that the index dipped in June after three months of gains. “Even with June’s decline, however, the Momentum Index remains near a 13-year high and well above last year. Compared to a year earlier, both commercial and institutional planning were significantly higher than in June 2020 (39% and 46% respectively). June’s retreat in planning activity is another sign that the recovery from the pandemic-led recession will be nonlinear. The current level of the Momentum Index and its underlying components, however, continue to signal that a more broad-based recovery in nonresidential construction starts will occur in 2022.”

Other forecasters agree that nonresidential construction spending in 2022 will exceed 2021 levels in most categories. AIA posted a “consensus forecast” on July 14, showing the average of eight forecasters’ predictions for 2022. All eight expect an upturn, with an average expected gain of 4.6%, barely outpacing an anticipated decline of 3.9% in 2021.

However, several developments could derail the rebound. Many materials costs continue to soar, potentially making some projects unaffordable. Extended lead times at factories and mills, combined with transport bottlenecks, mean that project completions could be pushed beyond 2022. And contractors report growing difficulty finding qualified workers.

One risk to the workforce is the low vaccination rate of construction workers. An online survey in May by Delphi Group found only 51% of construction and extraction workers reported being vaccinated, the lowest percentage out of seven occupational groups and far below the 79% rate for all occupations. Conversely, 42% of construction and extraction workers were identified as being “vaccine hesitant,” compared to 17% of all respondents. These factors are ominous at a time when the Delta variant of the virus is spreading rapidly, leaving more workers hospitalized or incapacitated.

In sum, construction activity continues to lag other sectors currently. There are positive signs regarding activity in a few months. But several developments could mar the recovery.