The American Institute of Architects' outlook for spending on nonresidential building construction in 2012 and 2013 is not dampened by Europe's debt crisis, international political instability, a looming fiscal cliff of tax increases and spending cuts and a wildly gyrating stock market.
On the contrary, the AIA Consensus Construction Forecast Panel raised its projection for nonresidential construction spending to 4.4 percent this year—up from a forecast of 2.1 percent growth at the beginning of the year. The increase is predicted to accelerate to a 6.2 percent gain in 2013.
Despite the obstacles, nonresidential construction activity got off to a good start this year. An unusually mild winter in most parts of the Northeast and Midwest allowed many projects to progress faster than expected in the first quarter. As a result, commercial construction activity had increased about 4 percent through April, and about 10 percent from the same period a year ago. Gains in institutional buildings—largely education and healthcare—have been more modest recently.
The first quarter of 2012 was a welcome relief, given that 2011 was the third straight year of declines in nonresidential construction spending. But while 2009 and 2010 had seen double-digit declines, the drop in 2011 was much more restrained. Overall nonresidential construction spending for buildings declined about 4 percent last year. The downturn was a bit less for commercial and industrial facilities, and a bit more in the institutional categories.
However, the disappointing pace of growth in the broader economy has limited the need for additional nonresidential facilities. While, given the steep downturn, the economy might have been expected to snap back more sharply, this recovery has been uncomfortably restrained. After recording 3 percent real (inflation-adjusted) growth in 2010, national gross domestic product (GDP) growth slowed to 1.7 percent last year, and increased to only 1.9 percent in the first quarter of this year.
As a result of this modest economic growth, job growth has also been disappointing. During 2011, business payrolls increased an average of just over 150,000 per month nationally, a level likely to barely accommodate new entrants to the labor force without absorbing currently unemployed workers. The pace of job growth improved in the first quarter of this year, to 225,000 per month, before falling back to under 75,000 per month through April and May.
Additionally, there is some risk that the national economy will take a hit in early 2013 when several major federal tax and spending changes could take effect. The Bush-era tax cuts are slated to expire at the end of this year, as are a temporary cut in the Social Security payroll tax and extended unemployment benefits.
On top of this hit to consumers, 2013 is the first year of the $1.2 trillion in automatic spending cuts over the coming decade that resulted from Congress’ inability to agree to a deficit reduction plan. It’s also the year that the federal government will again approach the legal limit on federal borrowing. In the unlikely event that nothing changes to address this “fiscal cliff," the Congressional Budget Office has projected that the national economy could turn back into recession in the first half of next year.
Housing not leading the construction upturn