Recovering Economy Staggers Toward Improvement

Rich Walker
December 1, 2010
COLUMN : Industry Watch | Markets & Trends

Looking toward 2011, we observe an economy rife with mixed signals, but with a difference. Most of the mixed signals are in terms of how big and how fast the recovery will be – not whether further declines of varying depth are in the offing.

McGraw-Hill Construction expects the economy to grow at a lackluster annual rate of 2.5 percent, but avoiding another recession. Among the mixed signals, Reed Construction Data, reports slow GDP recovery, a sharp fall in nonresidential public construction and a quick retreat in the new housing market after a tantalizing surge–likely due to the expiration of the tax credit and the problem with home foreclosures, which is still part of the mix.

Residential Construction
The uncertainty over economic growth continues to constrain new housing despite historically low interest rates and leveling housing prices. The U.S. unemployment level also makes consumers leery to spend more or incur more debt, especially as credit continues to be a problem. New home sales were at their lowest levels on record last fall based on data going back to the early 1960s.

On the other hand, home affordability remains high in terms of both low prices and low interest rates. Another encouraging component is built-up demand with a large number of people poised to move out of their parents’ homes, separate from roommates and create new households. Immigration has become an increasingly important driver of household growth as well.

Overall, new construction of single-family housing should see the strongest rebound in 2011, but the multi-family segment will be grow almost as much as a growing number of renters enter the market amid the housing crisis.

Nonresidential Market
Several signs portend a turnaround in nonresidential markets, with 2011 being, at the least, a transition year leading to a real recovery in the nonresidential market by 2012. McGraw Hill believes that market fundamentals will lead to an 8 percent overall nonresidential increase in 2011, with predicted sector rebounds including a 13 percent increase in office building work, which declined 23 percent this year. Other expected big turnarounds are a projected 13 percent increase in hotel and motel work, after falling 31 percent this year; a 25 percent increase in commercial building, following a 10 percent decline in 2009; and a 14 percent increase in stores and shopping centers, following a seven percent decline this year. By contrast, the construction of schools and colleges will continue to be weighed down by state and local budget deficits and shrinking alumni donations; however, over the longer term, aging school buildings need to be upgraded or replaced, and sooner rather than later.

Noting that nonresidential construction typically trails the overall performance of the U.S. economy by 12 to 24 months, the Associated General Contractors organization is more pessimistic. It projects that total nonresidential spending will be 0.1 percent less than 2010 levels.

Green Growth
The green sector remains a leading positive influence, bolstered by a proliferation this past year of green building standards and model codes for sustainable construction. McGraw Hil predicts that the dramatic growth in the green market that started in 2005 will continue through 2015– led by the health care market, which is the strongest in this category. Across the nonresidential sector, green projects are expected to account for $43-$54 billion in 2010, 35 percent of the total market (compared to 2 percent in 2005). In the residential category, the green market should be worth some $12 to $17 billion this year.

The bottom line: there is no doubt that a recovery is underway, but it is following an erratic path. The long-term trend is unavoidably positive as population growth, household formations and the inevitable recovery in the business cycle work to steadily increase pent-up demand. Whether that happens in two years or five years remains to be seen, but all industry members should plan now to participate in full.

Rich Walker is president and CEO of the American Architectural Manufacturers Association, 847/303-5664,