Article: Where are the Indicators Leading the Construction Industry in These Uncertain Times?

Where are the Indicators Leading the Construction Industry in These Uncertain Times?


Where are the Indicators Leading the Construction Industry in These Uncertain Times?

In spite of an unprecedented downturn in the US economy (US GDP declined 34% in Q2 from the prior quarter), and extremely high unemployment rates (unemployment just above 10% - far above the pre-COVID level at 3.5%), the economy seems to be bouncing back rather quickly. Consider the ISM PMI Index, which is a survey of purchasing managers within the broad manufacturing sector. The July 2020 read stands at 54.2, up nicely from its April low of 41.5 (a measure above 50.0 indicates expansion in the sector, while anything below 50 indicates contraction). So, the ISM PMI index has returned relatively quickly to its pre-COVID level.

Also, July 2020 orders for Durable Goods ticked up 11.4% in spite of economists’ expectations for a far more muted 4% increase. The durable goods measure is an indication of both consumers’ and corporations’ willingness to spend money on big ticket items (e.g. machinery, autos, airplanes, washers/dryers, etc.). Taken together, the ISM PMI index and Orders for Durable Goods provide us with a pretty good measure of the health of the US economy, particularly with respect to the manufacturing sector, as well as what we might expect regarding economic performance throughout the next several months.

But as we learned from the financial crisis earlier in this century, it’s difficult to enjoy a healthy US economy without housing and construction firing on all cylinders. Thankfully, and in spite of COVID-19, residential construction in the United States continues to be robust. The chart below tracks housing starts, permits and completions from July 2015 through July 2020. Both permits and starts are great indicators of future activity (growth or decline) in the sector. The chart shows that COVID-19 has had some material effect on the advancement of residential construction, given the steep declines in both starts and permits between March and May. But both of these indices are recovering nicely in May and continuing through July, and it’s no wonder many of our clients in the BPM sector continue to perform well, and in many cases have backlogs and a large book of incoming orders.

Privately-owned housing units authorized by building permits in July 2020 were 18.8 percent above the June’s read and 9.4 percent above July 2019, while single-family authorizations in July 2020 were 17.0 percent above June. Source: Monthly New Residential Construction, July 2020

Although, while residential construction is advancing full steam ahead, it’s important to look at commercial construction trends, as this sector also has relevance to many BPMs. A forward-looking index that tends to lead future commercial construction activity by 9 to 12 months is the Architecture Billings Index (ABI). It specifically targets non-residential construction activity, and the index is derived from monthly work-on-the boards surveys of architectural firms conducted by AIA’s Economics and Market Research Group.

In the ABI chart above, we can see that both inquiries and design contracts declined precipitously from March and into April of this year. Those declines correlate to the economic shut-down associated with COVID-19. April saw a slight comeback in Inquiries and Contracts and May and June show that activity roaring back, but from historic lows. So, even though the ABI numbers show commercial construction inquiries and contracts coming back in June, the numbers remain low (design contracts at 44.0 vs May at 33.1). And like the more widely published ISM PMI index, a number below 50 implies continued contraction. So, we have experienced several months from March through and including June that the Architecture Billings Index is signaling contraction (although it is coming back fast), and this lack of upcoming commercial construction activity may very well be presenting headwinds to BPMs in the commercial sector, but only in the short-term.

So, in this time of COVID-19, an election year, widespread protesting in our cities, and economic confrontations with China (the world’s second-largest economy), how is it that the US economy, and more specifically, the construction sector is faring so well? Most of the positive construction activity trends were already in play well before COVID-19 hit US shores. Construction activity, particularly residential, was heavily influenced by a shortage of single-family housing and high demand. This shortage has not abated while demand following COVID shutdowns has only increased with former big city residents (many of whom rented) flocking to the suburbs in search of housing, land, suburban amenities, and work-from-home options. Look for residential construction to continue on its torrid upward path, and as we leave COVID behind and introduce vaccines, expect commercial construction to come back and exceed pre-COVID levels.

Given that the economy seems to be on track for a healthy comeback, commercial construction looks to be bullish several months out, and residential construction is on fire, now is the time for BPMs to be executing strategies to gain market share and perhaps even penetrate new niche (or underserved) markets within the sector. BPMs should consider implementing programs and campaigns that not only introduce new products (or re-introduce products that could use some reinvigoration), but that create and maintain top-of-mind among architects. Residential projects continue to gain momentum and commercial construction activity is poised to return to normal growth rates, and in each of those sub-sectors, architects are on the forefront of planning and specifying. Therefore, make sure your company’s products are well known and on the minds of those within the specifying community.