'Modest decline' sounds ominous, but don't freak

August 11, 2010

On July 16, the AIA released its semi-annual Consensus Construction Forecast with the headline “Modest Decline in Nonresidential Construction Activity Anticipated in 2008 with More Dramatic Drop in 2009.” Before you jump off the 89-story building you just helped build, consider the facts.

The consensus report from AIA chief economist Kermit Baker calls for a “mild decline” in the nonresidential building sector of 1.2% in 2008, followed by a “more significant downturn” of 6.7% next year. That's not the best news we could have heard, but considering how the overall economy is performing (especially the homebuilding sector), it could have been a lot worse. So, light a candle and count your blessings.

More to the point, the AIA report represents the consensus of six highly respected construction industry forecasts—FMI, Global Insight, McGraw-Hill Construction, Moody's Economy.com, Portland Cement Association, and our own Reed Business Information—each with some wide variations from the consensus.

For example, our own BD+C/RBI economist Jim Haughey sees nonresidential construction growing 5.8% this year and 4.3% in '09, well ahead of the consensus, while Portland Cement Association economist Ed Sullivan foresees a 7.7 drop this year and another 12.7 next. That's a big spread.

It gets even more interesting as you drill down. For healthcare, the consensus is pretty flat: 0.2% growth in '08, 1.1% in '09. Once again, however, there's wide variation: from McGraw-Hill Construction economist Bob Murray's -5.6% in '08 to -2.6% in '09, to FMI economist Heather Jones's 4.4% in '08, -1.1% in '09, to Moody's Economy.com economist Mark Zandi's 1.7% in '08, 0.5% in '09 forecast, to RBI's Haughey, at 4.1% growth this year and 7.4% next year.

As is often the case with the dismal science of economics, there are technical reasons for these variations. But the most important thing to keep in mind is this: These numbers are not that bad, relatively speaking. I mean, when was the last time you heard “mild decline” applied to the Dow Jones Industrial Average? In the words of the AIA's Baker, “The one bit of good news is that this contraction in activity is likely to be considerably milder than the construction recessions of the early 1990s and earlier this decade.”

Now, what does a “mild decline” leading to a “significant downturn” mean for your business? As we stated in April (“How to prepare for—Shhh!—the 'R' word”), you should be cautious about hiring or opening a new office. You need to re-work your strategic plan. Your estimators and specifiers are going to be more important than ever to your success, given the unpredictability of the cost of materials. And you're going to have to be more persuasive with clients to get them to accept some of the burden of these cost spikes.

Most important, don't panic (unless you bank at IndyMac). There's still plenty of work out there, and let's face it, was it realistic to think you could keep up with the insane pace of the last few years?

The AIA consensus forecast report can be accessed at:www.aia.org/aiarchitect/thisweek08/0711/0711b_consensus.cfm


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