EMBERS OF THE
MAGAZINE 2017 ECO-
nomic roundtable were polled in late Aug- ust to get a sense of their expectations for the balance of the year. Overall, they ex- pect stability, but with certain pockets of uncertainty, such as the impact of the hurricane season and labor shortages among architects and designers. Here, we checked in with Neal Lyons, who serves as vice president, partner project systems, for Schneider Electric; Kermit Baker, chief economist of the Amer- ican Architectural Association and the over- seer of the Architectural Billings Index (ABI); and Colin McIntyre, U.S. engineering and construction deals leader at PwC.
I don’t see a slowdown in the do- mestic recovery and expect growth to con- tinue throughout 2018. At Schneider, we have seen balanced growth across all construction segments, and with the dollar weakening, I would expect manufacturing growth to con- tinue. Additionally, I still expect a .25-point rate change in December. Some economists are still calling for a recession in 2019, primarily because of the duration of the current recovery. With modest to lower growth over the past nine years, we may be able to avoid a recession until the 2020 time frame. I would expect any such recession to be fairly mild. Hurricanes Harvey and Irma will have significant re- gional effects, with construction recovery having a big impact on distributors in the storm-hit areas. A material factor in Houston is that after a slumping multifamily resi- dential market over the past two years, all apartments in the impacted area are fully leased through 2018. Therefore, new construction will have to take place.
Our indicators here at AIA suggest strength in the construction sector. The July figures show the continu- ation of healthy trends for the sixth consecutive month. Our ABI is an important nine to 12-month leading eco- nomic indicator in that sector. For the latest ABI in July, architecture firms reported increasing demand for design services. While the score was 51. 9, down from a score of 54. 2 in the previous month, it still reflects an increase in design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 59. 5, up from a reading of 58. 6 the previous month, while the new design contracts index increased from 53. 7 to 56. 4. All regions seem positive, although the West is a bit slower than the South, Midwest, and Northeast, which are very evenly matched.
In addition to the balanced increases in design billings across all major regions and construction sectors, the strong gains in new project work coming into architecture firms point to future growth in design and construction activity over the coming quarters. However, a few concerns loom on the horizon. Hurricane Harvey’s impact on oil and natural gas refining and distribution remains unclear at present but could produce some pricing disruptions in the short run. Additionally, labor shortages persist throughout the entire architecture, engineering, and construction in- dustry, which are causing scheduling delays and rising compensation costs.
There is uncertainty in the markets themselves, and consequently in the E&C M&A markets in which we work. The Trump administration’s infrastructure pro- grams and corporate tax reform are aspects of that for sure, although we saw stabilization in the second quarter of 2017, which we link to companies moving past trying to determine what may or may not happen regarding not only infrastructure spending, but also corpo- rate tax reform. While there is talk of action on tax reform [this year], the likelihood that any actions will have a material impact is more likely a 2018 event. However, at PwC we believe we will continue to see normal levels of growth tied to the steady economic condi- tions across the markets. With regard to the Trump admin- istration’s actions on infrastructure spending, we believe this will be additive to near- and middle-term growth as fueled by additional investment dollars from a federal level. Macro-economic factors (e.g., infrastructure up- grades long past due, population growth fueling needs for new investment, etc.) that influence engineering and con- struction investment are positive. Still, at this point, it is unlikely any specific political measures that have been discussed will influence the en- gineering and construction markets in a material way for the balance of the year and are more likely to play out in 2018 or beyond. For the balance of the year, we think any change in the domestic market would be tied to geopoliti- cal events as yet unforeseen that might somehow cause projects to be put on hold or defunded. Any geopolitical event outside the United States that has a cascading impact domestically on the debt and equity markets could be cause for major uncertainty, but again, at this time we don’t ex- pect any such event. ;
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