It is important to note that the Q1 2020 Outlook represents a best-case scenario that considers several, but not all, of the ongoing market dynamics. Based on the speed and breadth of current socioeconomic disruptions, FMI is anticipating, at minimum, a recession spanning the second and third quarters of 2020. Depth and reach of these disruptions will remain under watch through the coming months, and FMI’s economists will be providing more frequent updates on their industry forecasts in the coming weeks.
FMI Managing Director Jay Bowman discusses COVID-19 industry implications and outlook
Total engineering and construction spending for the U.S. is forecast to end down 1 percent in 2020, compared to 0 percent growth in 2019.
Spending growth in 2020 is expected to be led by public institutional and infrastructure investments across both nonresidential buildings and nonresidential structures. Current anticipated top-performing segments forecast in 2020 include public safety (+6 percent), transportation (+4 percent), water supply (+4 percent) and conservation and development (+4 percent). Forecast bottom-performing segments in 2020 include religious (-8 percent), commercial (-7 percent), amusement and recreation (-7 percent) and lodging (-3 percent).
Many segments were downgraded, comparing growth in 2019 and forecast growth 2020 as a result of shifting cycles within the E&C industry on top of significant recent economic disruptions. Office, transportation, power, highway and street, sewage and waste disposal, water supply, and conservation and development were all revised from “up” to “stable.” Additionally, amusement and recreation as well as manufacturing were downgraded from “stable” to “down.” Lodging was downgraded appreciably from “up” (+7%) in 2019 to “down” (-3%) in 2020.
FMI’s second quarter 2020 Nonresidential Construction Index (NRCI) at 53.2 remains optimistic and is reflective of the strong and stable industry sentiment seen through most of the first quarter. This reading is also likely an early indication of changing sentiment due to the various economic disruptions initially realized towards the end of the first quarter.
Total Construction Put in Place Estimated for the United States
Throughout the value of construction put in place includes the cost of architectural and engineering work.
Source: U.S. Census and FMI Forecast
Total Construction Put in Place 2020 and Forecast Growth (2019-2024 CAGR) by Metropolitan Statistical Area
Source: U.S. Census and FMI Forecast
Over the coming weeks and months, FMI anticipates much more information forthcoming to help drive our expectations around current economic developments. Only time will provide clarity and understanding in how converging current events unfold related to COVID-19, oil price collapse, political uncertainty and the significant volatility seen across domestic and international financial markets.
The estimates and assumptions presented within this first quarter Outlook include two quarters of negative GDP growth in the second and third quarters of 2020, defining a minimum period for an economic recession. However, we understand that the duration and reach of the factors noted in our introduction could send severe shockwaves far beyond what is apparent today.
In the chart below, we illustrate a range of possibilities that will be under watch and explored in future publications. Within the chart, given what we know today, our extended disruptions line assumes three quarters of negative GDP growth and is primarily a result of an extended management period for COVID-19 disruptions on top of stalled economic stimulus. Alternatively, the worst-case “disintegration” outcomes suggest at least six quarters of negative GDP growth (similar to the duration of the Great Recession) as declines lead to irreparable financial damage and implications across multiple industries and seemingly healthy organizations and corporations.
Residential Construction Put in Place
Limited short-term demand for home sales and increasing inventories are expected
Supply chain disruptions become an added challenge in delivering lower-cost starter homes
Affordability and availability issues persist despite falling interest rates
Economic climate is expected to remain fragile into 2021
NRCI scores are based on a diffusion index where scores above 50 represent improving or expanding industry conditions, a score of 50 represents conditions remaining the same, and a score below 50 represents worse conditions than last quarter (or contraction).
Q2 2020 survey responses were collected between March 3 and March 16.*
*It is important to note timing of this survey and that the current Q2 reading is likely an early indication of changing sentiment due to the various economic disruptions first seen towards the end of Q1.
The data in the NRCI is presented as a sampling of construction industry executives voluntarily serving as panelists for this FMI survey. Responses are based on their experience and opinions, and the analysis is based on FMI’s interpretation of the aggregated results.
Nonresidential Construction Put in Place
Travel (both business and leisure), RevPar and occupancy rates all plummet through 2020 as a result of COVID-19
Significant added supply through late 2019 and projects underway
Transportation and infrastructure projects support long-term elevated spending in select markets
Drivers: Occupancy rate, RevPAR, average daily rate, room starts
Downtown markets experience rent stabilization while vacancy rates trend higher
Slowed employment growth expected to weigh on future spending
Shared office space and coworking businesses will be challenged
Demand for data center investment continues to expand rapidly alongside 5G deployment
Drivers: Office vacancy rate, unemployment rate
Continued and accelerating rise in e-commerce across nontraditional platforms (e.g., grocery, pharmacy, automotive, etc.)
Demand for warehouse and distribution stalls for the first time in years, favoring smaller facilities alongside fewer imports tied to trade negotiations and supply chain disruptions
Brick-and-mortar retail challenges continue with recent investment shifts into travel, leisure and entertainment
COVID-19-related (international and domestic) supply chain disruptions, political uncertainty, ongoing trade tensions and oil price collapse support continued decline in industrial production into 2021
Large-scale planned petrochemical investments along the Gulf Coast postponed or shelved until oil prices rebound and volatility in the energy sector stabilizes
Transportation equipment subsectors remain weakened through 2021
Jay Bowman is a principal with FMI. Jay assists a broad range of stakeholders in the construction industry, from program managers and general contractors to specialty trades and materials producers, with the identification and assessment of the risks influencing the strategic and tactical decisions they face. In this role, Jay’s primary responsibilities include research design and interpretation, based on developing an understanding of the context within which these organizations operate. Jay can be reached at firstname.lastname@example.org.
Brian Strawberry is a senior economist with FMI. Brian’s expertise is in economic and statistical modeling. He leads FMI’s efforts in market sizing, forecasting, and building product/construction material pricing and consumption trends. The combination of Brian’s analytical skills and creative problem-solving abilities has proven valuable for many contractors, owners and private equity groups as well as industry associations and internal research initiatives. Brian can be reached at email@example.com.
Emily Beardall is a senior analyst for FMI’s strategy practice. Emily is responsible for creating and developing tools to deliver innovative solutions for our clients. She is committed to utilizing these strategic tools to improve company performance and profitability. Emily can be reached at firstname.lastname@example.org.