ABC economist predicts a ‘W’ shaped recovery for construction industry

ABC economist predicts a ‘W’ shaped recovery for construction industry

Anirban Basu has forecasted that a recession may still be on the horizon given a surge of coronavirus cases, lack of new stimuli from Congress and supply difficulties.

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December 17, 2020

According to a 2021 economic outlook published in Construction Executive magazine, Associated Builders and Contractors’ Chief Economist Anirban Basu has forecasted a recession threat for the construction sector next year.

“Another recession may be on the horizon. Critically, one could occur even if a further stimulus is passed,” Basu said. “Stimulus supports the demand side of the economy, primarily. Another shutdown would compromise the economy’s ability to produce (supply side), presumably leading to another round of mass layoffs, job loss, crumbling consumer confidence, corporate bankruptcies and other negative outcomes. If the first recession is any indication, the next one will be sharp and short. Regardless, that would delay complete recovery, which is the ultimate aspiration.”

Although ABC’s Construction Backlog Indicator rebounded to 7.7 months in October and construction had added 689,000 jobs by September (after a loss of 1.1 million in March and April), Basu indicates that another surge of case numbers paired with a lack of new stimuli from Congress, as well as supply difficulties—such as increasing softwood lumber and steel prices—will likely result in a “W” shaped recovery.

Commercial real estate, Basu determines, is particularly on the outs because the majority of the American workforce has abandoned Class A office spaces for their homes. In fact, the negation of commutes, childcare concerns and office distractions have meant that 37 percent of workers now complete their jobs entirely from home, the association states.

“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 said. “This only adds to the simmering uncertainty that lingers, resulting in less risk-taking among developers and others who procure nonresidential construction services. Nonresidential construction employment is down almost 6 percent on a year-ago basis as winter approaches.”

Basu also notes that backlog data has been receding, with some contractors indicating that they will exhaust current backlog by year’s end. In addition, according to ABC’s November Construction Confidence Index, the readings for sales, profit margins and staffing levels once again decreased, although staffing levels remained above the threshold of 50, indicating expectations of expansion over the next six months.

However, Basu has illuminated some potential economic bright spots, such as e-commerce and Class B office space.

“Even with all these negative signs in the construction market, there are some bright spots,” he said. “One segment that has benefited from the shutdowns and social distancing measures is e-commerce.”