Economic and pandemic uncertainty staggers construction comeback

As we enter a new year, industry economists are presenting a mixed bag of construction forecasts as a result of the ongoing pandemic and related economic turmoil. “Not surprisingly, the 2021 market reflects the broader Covid-19 economic contraction that began in February 2020,” says Dr. Alison Premo Black, the American Road & Transportation Builders Association’s chief economist.

ARTBA expects the U.S. transportation construction market to shrink 5.5 percent next year, driven primarily by the severe economic recession caused by the coronavirus pandemic. Overall, the value of work is expected to drop from $294.2 billion in 2020 to $278.1 billion in 2021, according to Black’s analysis. However, she cautions that overall transportation construction activity will vary across the country as states deploy different strategies to balance their budgets and manage debt. States are expecting shortfalls in transportation revenues of anywhere from $35 billion to $40 billion through 2024, according to ARTBA.

Among key segments, ARTBA estimates work on private highways, bridges, parking lots and driveways will decrease from $72.3 billion in 2020 to $66.4 billion in 2021. The pace of bridge and tunnel work is expected to decline 2 percent in 2021. Public transit and rail construction will decline 1 percent from $24.5 billion in 2020 to $24.2 billion in 2021; while airport construction, including terminals, runways, and related work, will decline 17 percent from $24.6 million to $20.5 billion before resuming growth in 2023.

On the other hand, the 2021 Dodge Construction Outlook, a mainstay in construction industry forecasting and business planning by New York-based Dodge Data & Analytics, predicts highway and bridge starts will make modest gains this year. It estimates $75 billion in total investment for 2021, which would be the second largest yearly total over the past 15 years.

“The Covid-19 pandemic and recession has had a profound impact on the U.S. economy, leading to a deep drop off in construction starts in the first half of 2020,” says Richard Branch, chief economist for Dodge Data. “While the recovery is underway, the road to full recovery will be long and fraught with potential potholes. After losing an estimated 14 percent in 2020 to $738 billion, total construction starts will regain just 4 percent in 2021.”

Branch adds that “…The dollar value of starts for residential buildings will increase 5 percent in 2021, nonresidential buildings will gain 3 percent, and nonbuilding construction will improve 7 percent. Only the residential sector, however, will exceed its 2019 level of starts thanks to historically low mortgage rates.”

Associated Builders and Contractors’ Chief Economist Anirban Basu forecasts a recession threat for the construction sector this year with nonresidential construction the weakest it has been in more than a decade. Commercial real estate has been hit particularly hard, he notes, with industry fundamentals in tatters as more companies choose to work remotely, more retailers go bankrupt and hotels remain under-occupied.

“Survey data indicates that lending to commercial real estate ventures has tightened, while state and local government finances have been compromised, especially in states that depend upon substantial tourism activity,” Basu explains. “This only adds to the simmering uncertainty that lingers, resulting in less risk-taking among developers and others who procure nonresidential construction services.” Basu does illuminate some potential economic bright spots, such as e-commerce and Class B office space, the former benefitting from shutdown orders and social distancing measures.

Although there are disagreements on how the construction market will perform this year, there is a consensus that federal aid—stimulus or funding—and expanded vaccine efforts will continue to have a positive impact. Notes Branch, “business and consumer confidence will improve over the year as further stimulus comes in early 2021,” in addition to vaccines becoming more widely distributed. However, he believes that it will take the construction markets a significant amount of time to make a full recovery.

“Congress and the president could help mitigate the economic downturn and put the nation on the road to a stronger recovery by approving a long-term, robustly funded transportation infrastructure investment package early in 2021,” ARTBA’s Black notes. She adds that market growth could resume in 2022, provided that economic conditions improve and travel demand in some sectors begins to return to pre-recession levels.

In its annual Fall Forecast, the Portland Cement Association predicts a modest decrease in cement consumption during 2021. The association expects cement consumption, based on the weighted average of three different economic scenarios, will lessen by 0.9 percent in 2021.

All scenarios are characterized by a significant increase in Covid-19 infections during the fourth quarter of 2020. The “U” shaped scenario would entail an increase in infections consistent with many baseline epidemiologist projections. In this scenario, the economy achieves a gradual sustained recovery, and 2021 cement consumption nearly reaches 2020 levels. Demand growth is forecast at around -1.3 percent in 2020, improving to 0.5 percent in 2021.

The “W” shaped scenario would entail an uptick in Covid-19 cases consistent with many high-case epidemiologist projections. According to this scenario, consumers’ retreat, state governments become more active in preventing Covid-19’s spread, and a two-quarter recession develops in 2021. Cement consumption’s decline is more acute in 2021, dropping from an esitmated -1.8 percent in 2020 to -3.4 percent. The path of recovery under this scenario is also slower.

The “Vaccine” scenario is the best possible outcome, which follows the “U” through the first half of 2021 and a vaccine is widely distributed by third quarter 2021. Under this scenario, cement consumption grows throughout the forecast horizon. Following a 1.3 percent contraction, market growth is predicted to accelerate from 0.7 percent in 2021 to 5.1 percent in 2022.

“We think that the gradual sustained recovery, the ‘U’, has the largest likelihood followed by the ‘Vaccine’ scenario. The growth interrupted ‘W’ scenario is the least likely,” says PCA Senior Vice President and Chief Economist Ed Sullivan. “Nonresidential will be among the weakest construction sectors specifically within retail, hotel and office. Combined that accounts for almost 90 percent of the declines we’re expecting in this sector.”

Sullivan adds that federal aid has been successful in preventing a deeper and more prolonged economic decline, but insufficient support in the near future could hinder public construction activity as states continue to face disruptions in revenue collections.