Economist Discusses Non-Residential Construction Business Conditions and When to Expect Improvement

“The national economic recovery seems to have begun, but we have not yet seen any evidence of that on the non-residential side. So question is: when will the upturn hit the construction industry and how can we track the upturn as it begins to approach?” That was the question asked by Kermit Baker, the American Institute of Architects’ chief economist, during a recent economic forecast he titled, “Economic Recovery: Under Construction Timing of a Design and Construction Rebound.” In his discussion Baker covered three topics: where the industry stands at present; business conditions at architectural firms; and when we can expect to see conditions in non-residential construction improve.

Baker echoed many of the same sentiments of fellow economist Ken Simonson with the Associated General Contractors of America (CLICK HERE for related article). Beginning with employment situation, Baker said in the broader economy job losses are occurring, though slower than they were a year ago.

At the beginning of 2009 we were losing close to 700,000 payroll positions/month nationally; that dropped to under 100,000 month [by the end of] 2009,” said Baker. “Within the construction industry losses are also slowing. We were losing about 100,000 or more a year ago and that was down to about 50,000 a month by the end of the year. Losses in construction sector are slowing at a slower pace than losses in the broader economy and the construction industry is one of the few sectors in our economy that’s still in recession. As such the unemployment rate in construction is broader than it is in he overall economy.”

When it comes to architectural firms, Baker said that they, too, are seeing declining payrolls, having lost about 40,000 positions since their high in mid-2008.

“That works out to more than 17 percent of all employees at all architectural firms,” said Baker, adding that it does not include part time workers, cut backs, salary freezes, etc. “Declines have been slowing so there are encouraging signs we may be near the bottom in terms of losses throughout the profession.”

Baker noted that the AIA’s Architectural Billings Index, which tracks inquiries for new projects, continues to be strong but that interest is not converting into new levels or new projects.

“It indicates that architectural firms are expanding their search for projects and as a result of that we are seeing more bidders on each project and more inquiries, but they are not resulting in more projects,” said Baker, adding that the residential index is the most encouraging. “Our sense is residential will be the first to recover.”

Baker also discussed business conditions at architectural firms and said they are entering the year coping with a very sharp downturn in 2009.

“Almost 80 percent of firms estimate seeing losses for 2009. Looking at 2010, many firms are expecting continuing challenging business conditions for the year ahead with 45 percent of firms are projecting further revenue declines this year. Fewer than 30 percent are projecting revenue growth,” said Baker.

In discussing the timing of the downturn and when can expect to see better conditions, Baker said that non-residential construction is typically the last major sector in our economy to recover because businesses don’t want to invest in new facilities until they are sure that an economic expansion is underway and can be sustained.

“The current trend does not seem destined to move into a recovery phase any time soon. The way we track this information is by seeing the progress of key indicators in the economy and trying to develop some timing relationships to see when the cycle is likely to end and move back into expansion phase,” said Baker, who added “Before we see any major movement in the economy we almost always see a major movement in the stock market prices. After we see a change in the direction of stock prices, often that shows up with a change in gross domestic product and as things improve the economy will hit bottom and we’ll see growth coming out of that.”