November 21, 2019

The 2020 Economic Forecast for the Engineering Industry

Engineering Influence sat down with Richard Branch, the Chief Economist for Dodge Data and Analytics to discuss the 2020 economic forecast for the A/E/C industry.

Transcript:

Host: Welcome to another episode of engineering influence ACEC's regular podcast series. Today we're talking with Richard Branch, who is the chief economist for Dodge Data and Analytics. And we're going to talk about his 2020 forecast for the construction and engineering industries. Good morning Richard.

Richard Branch: Good morning. How are you?

Host: Doing well, thanks. So this is your first forecast for Dodge. Can you give us a little bit about your background?

Richard Branch: Sure. So yeah, our previous chief economist Bob Murray, a well deserved retirement. He ended his term at the end of August. I started right after him in September. I've been with Dodge about 10 years now. My previous position here as a senior economist covering mostly the commercial markets as well as our Canadian forecast.

Host: Great. I saw that you're a graduate of university of Ottawa. Are you? Are you Canadian?

Richard Branch: I am. I'm actually a dual citizen, so I went, did my undergraduate at the university of Ottawa, moved down to Boston to do my graduate work in economics at Boston College and fell in love with the city. And fell in love with my wife who's a Boston girl and stayed here.

Host: And you live and you work out of Goffstown I saw. Is that, is that right?

Richard Branch:  Well my our office is in Bedford, Massachusetts, just a little bit North of, of Boston's one of the Northern suburbs. But I live in Southern New Hampshire.

Host: Well a couple of weeks ago Dodge put out its forecast for for 2020. What's your view on the the AEC industry for for next year?

Richard Branch: Sure. So what we're looking at for total construction activity in 2020 and the total construction being the sum of residential construction, non-residential buildings as well as what we would call non building. That's kind of the infrastructure side of the market. We're looking at a decline of 4% for 2020 $776 billion in terms of construction starts for next year. Just to put that into perspective, that would bring the construction industry back to about where we were in 2017. So certainly not a cataclysmic drop in activity next year, but certainly a settling back after several long years of us with several years of strong growth.

Host: And why do you see that settling back taking place?

Richard Branch: Well, we're certainly starting to see the seeds of slower economic growth in the U S. GDP was 2.9% in 2018. We're expecting it to slip this year down to around 2.3% for 2019 and we expect the economy to slow even further in 2020 down to around 1.5% growth. So not recessionary, but we're starting to see the effects of the trade uncertainty the tariffs that have already been put in place as well as the potential for future tariffs causing uncertainty amongst business leaders in the economy. And we expect that to result in, in a continuation of a slower of job growth, which we've seen this year. In addition to the fact that just how tight the labor market is right now. Certainly in the construction industry, the lack of available labor is certainly a key issue and we think that works to constrain growth in, in construction next year.

Host: I mean, with, with your point about the labor market as well as the slowing economy are those pushing the combination of those two things, are they pushing the the industry down a little farther than it might've needed to be if one or the other weren't a part of the equation?

Richard Branch: I think so. I, you know, we, if for not that the trade uncertainty, if, if the labor market had if there were, if there were more available workers, we certainly wouldn't see economic growth slow. To the extent that we're expecting it to do in 2020 you know, it would be back above potential growth - the potential rate of growth in the U S economy is around 2% give or take. So barring those two events, we would probably see another year of slightly above potential growth next year.

Host: So in, in, in your forecast, are there certain sectors that you expect to perform better than average or better than the average of all of them in 2020?

Richard Branch: Yeah, absolutely. It to put a fine point on it. I would say that projects that have some semblance of public funding will do okay in 2020. So we're talking education, construction, particularly K through 12, healthcare construction, some transportation construction in terms of airline terminals and whatnot. As well as some of the infrastructure categories. We're talking streets and highways. Environmental public works like water system sewers. Those should do a well, those should do okay. Next year, you know, moderate growth where we expect to see the slippage in 2020 is more on the commercial side. So these are projects that are highly tied to the overall growth rate in the economy. So we're talking offices, retail and warehouses. We expect that market to slip back next year along with the residential market. FAST Act expires in September, 2020. So there would be need to be a new surface transportation bill to take effect after that. The growth that we're expecting on that streets and highways is really that, that last year of the FAST Act.

Host: And and you were mentioning the ones that you don't expect to do as well and you, you met you, you mentioned housing. Is that a, is that basically is that a job growth thing or what would you attribute to slow down and housing to?

Richard Branch: Yeah, great question. So I think you've got to have two separate discussions here. First of all, single family, single family has really underperformed in this cycle. Due to for the most part, affordability housing prices essentially been growing faster than wages and incomes and, and pushing people out of that suburban single family market. More often than not, that has been, has been the Millennial age group.

Richard Branch: And as the millennials start to age, we're seeing that group continuing to have difficulty entering the market mostly because of the lack of available supply of that entry level or starter home. People just aren't able to build those homes because the margins are pretty tight. So on the single family side we see it more as a supply issue as opposed to a demand issue. Whereas on the multifamily side, very aggressive growth over the life cycle. So we had all those folks that were were forced out of the suburban single family market going into either townhouses or condos or the rentals, all of that track in, in multifamily. So that has seen very aggressive growth throughout this cycle. And what we're starting to see already this year is a bit of a pullback and especially in larger metropolitan areas. So places like Chicago, excuse me, not Chicago, places like Boston, San Francisco, Los Angeles, Miami, even New York City starting to ebb a little bit. And so it's, those are pulled back in those larger markets that are pulling back that the multifamily side. But as you mentioned, the multifamily side is very much tied to overall economic growth, very much especially tied to labor market growth. So that's also having a bit of a negative effect on the multifamily market in 2019.

Host: And one market that a lot of our members are involved in is, is the power market, the you know, building pipelines building transmission lines....where do you see that market going?

Richard Branch: Sure. So the electric power category as we classify it is, includes your traditional fossil fuel plants. It includes LNG export facilities all those big things that are being built down in the Gulf Coast. It also includes the transmission lines as well as renewable. So wind and solar utility scale, wind and solar. That market's actually doing very well this year FERC has streamlined their approval process for LNG facilities. And as such, we've seen several large projects break ground this year. Particularly the Cameron LNG facility in Louisiana was a $4.2 billion project that broke ground earlier this year. So that side of the market seems to be doing well as well as the wind power side, renewables the, the traditional fossil fuel plants not doing so well. There was a good period of growth in the 2014 to 17 range as more natural gas fired plants were being started. But that has started to ebb back slightly. And on the transmission side, we're certainly starting to see growth there, whether it's a grid hardening. So these are our utilities looking to protect their, their infrastructure from storms and whatnot, or circling back to that renewable side, all those wind plants in the Midwest in terms of building transmission lines to bigger power centers.

Host: Great. Thank you. That's great. So one question that I've had for a couple of years about, about the Dodge forecast as it is you, as you use the dollar value of starts, what, why, what, what do you see the value the forecast value of that?

Richard Branch: So why, why do we, why do we talk in terms of dollars?

Host: Yes. Yeah. I the value of,

Richard Branch: Yeah, that's, that's a great question. So our data, we actually forecast both the square footage figure as well as the dollar value. I tend to like to talk about the dollar value figure for for two reasons. Number one, it does include that non building sector, that infrastructure side where there is no square footage applied in those, in, in those building categories, but also it's more inclusive. So our dollar value figures include new construction, it includes additions, but the key part is it also includes renovation activities. So it's a much more inclusive. And, and when you look at say a category like retail where a significant chunk of the retail sector in terms of construction is actually renovation work. I, I think it's important to talk about that opportunity, whereas the square footage side of our data doesn't include renovation.

Host: Great. That makes sense. Yeah. And and one of the things I think I saw in the, in the forecast was a bit about server farms or whatever the proper term for that is...

Richard Branch: Data centers

Host: Data centers. Yeah, that seems to be a big continuing to be a big growth area.

Richard Branch: It is. So we classify data centers as office construction. And back in 2017, data construction was about five point $4 billion, accounted for about 13% of all office activity in terms of our data, 2018 up to $10.4 billion in construction for data centers. 22% of all office activity was data centers and that demand for cloud space and for telecommuting and the like has certainly kept this market very strong. And we expect that to continue certainly in the years to come in and will actually be a bit of a cushion to the office sector. Whereas the traditional office sector, will pull back a little bit. As the economy slows, it should be cushioned slightly by those data centers and they're very, very expensive projects in terms of the infrastructure, in terms of the wiring and in terms of the HVACs, they are very complex buildings. Very expensive.

Host: That's remarkable growth.

Richard Branch: Yes, absolutely.

Host: So looking at, turning towards towards our members, the engineering from the firms around the country, from from a Dodge forecast, you know, you typically look into the coming year. What, what lessons can engineering from leaders take from, from those, those numbers and descriptions?

Richard Branch: Sure. Well, I think that the big thing I've been saying to folks as we unveil our forecast is, and I believe I mentioned this at the outset, is we need to remember that even though this was the decline of 4%, this isn't what we saw in 2007, 2008, there will still be loss of opportunity for growth across the construction industry. And we need to remain aggressive. We need to remain creative in terms of finding those opportunities. And those different opportunities may exist in different geographies than you're currently used to. They may be different building verticals than you're used to say education versus say a more commercial sector. And that this will be because there's no systemic underlying economic issues like we saw in 2007, 2008. This will be a fairly short downturn. And then by the time we're back into 2021, we should start to see those seeds of growth in the building markets again. And it's important to prepare for that 2021 return to growth in 2020. Again, in terms of being creative and being aggressive.

Host: So you, so looking a little farther into the future, you see 2021 is a stronger year than 2020.

Richard Branch: Certainly on the residential side of the market. Absolutely. that will be kind of the, the engine of the recovery in 2020 in terms of construction markets. And then we should start from the commercial construction kick in, in terms of growth towards the end of 21 into 22 and then institutional. So things like schools and hospitals lagging a little bit after that.

Host: Well, that's very optimistic.

Richard Branch: Again, I think so. I certainly compared to what we just went through, you know, 10 or 12 years ago this will be a fairly mild downturn. I again, I there, there's nothing systemic in the economy that's pointing to a longterm catastrophic pullback and activity like we had in the last cycle. This will be fairly short, be fairly mild, and as long as folks, again, are being creative and aggressive and finding opportunities they will fund.

Host: Oh, great. Well, I appreciate your taking the time to talk with us. This has been a very enlightening,

Richard Branch: Thank you. Happy to do it. Thanks for having me.

 

 

 

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