With the Federal Reserve Board raising fund rates, fuel at historic lows, and consumer confidence up, the U.S. economy is on track to continue creating jobs and improve wages in the year ahead. This is good news for a construction market that’s been waiting patiently for the industry to “catch up” to the national economic recovery.
According to FMI’s Fourth Quarter 2015 Construction Outlook, raising interest rates has historically signaled a need to tame inflation, but the current rate of inflation is near zero. Nonetheless, the Fed feels the economy is strong enough now that reducing the money supply will help add confidence for savers and reduce the potential for future jumps in inflation.
“The real interest rate is the most relevant for capital investment decisions,” according to a recent FMI Quarterly article. “The Fed’s ability to impact real rates of return, especially longer-term real rates, is limited at best. Except for the short term, real interest rates are determined not by the Fed, but by a wide range of economic factors, including the components of economic growth.”
Of course, interest rates are only one part of the equation; the overall health of the economy is a larger driver of engineering and construction spending. In fact, it is actually worse if the Fed is not comfortable raising rates due to a fragile economy. Instead of solely focusing on the federal funds rate, keep an eye on gross domestic product (GDP), inflation, unemployment and residential construction.
Based upon historical performance, U.S. construction spending has room to grow and could once again align with or possibly even surpass nominal GDP. This obviously assumes a healthy return to late 1990s economic activity levels. The bottom line for now is that we will have a better idea over the next six months of what our combined bottom lines look like.
In the meantime, the economy is growing and unemployment is low as we kick off the New Year. Looking back one year, FMI “optimistically” projected 6 percent growth in total nonresidential construction for 2015. It seems our early optimism for 2015 wasn’t bullish enough as it now appears that several construction sectors exceeded those expectations by large margins. The most notable improvements in growth took place in lodging (up 23%), office construction (19%), amusement and recreation (16%), and manufacturing (25%).
As construction gets busier, productivity improvement becomes more of a challenge. Contractors are leveraging technology like Building Information Modeling (BIM), GPS, prefabrication, modularization, and even robotics for dangerous and repetitive tasks like welding. This is still a small portion of the industry that is in the vanguard, but FMI expects to see these technologies and new business practices to expand – especially in areas where it has been difficult to find skilled workers (and in highly competitive markets). As we move into 2016, productivity improvement will be critical for organizations across the board no matter how the stock markets and/or interest rates fluctuate during the year ahead.