Thursday, August 7, 2008

Live from Denver: Economic Outlook

After Johansson's keynote, we listened to the first half of the "Economic Outlook and Hot Markets" breakout session. The highlight for us was hearing the numbers and statistics from McGraw-Hill Construction's Rusty Sherwood. Sherwood's presentation of McGraw-Hill Construction data on the AEC industry was clearly the reason many of those filled the room, as when he was done, people started leaving slowly. He shared tons of data that we still need to process, but here are some takeaway points:

"It's a bit premature to sell everything, join a cult, and wait for the end," Sherwood said, alluding to the notion that the United States is mired in the throes of economic despair. In fact, Sherwood there are pockets of encouraging news in the AEC industry that "don't make news like they should." The U.S. is not in a recession, which is defined by two straight quarters of negative growth.

Oil and fossil fuel prices are up, and while the dollar has softened, it has picked up in the last few days against the euro. "We've moved from trying to stimulate the economy by access to capital to concern about inflation. We're in a bit of a stalemate," Sherwood said.

The 2008 federal budget is okay, but the United States is carrying a "pretty significant deficit." He added that the United States has so many pent-up infrastructure needs that, regardless of who wins the presidential election in November, the needs "will be addressed."

That's good news for the AEC industry, as is the fact that there are pockets of single-family housing activity in Texas and parts of the Southeast, although the market is one-half the size of its 2005 peak, Sherwood said. Non-residential construction (hotels, manufacturing, institutional facilities) is another bright spot. Hotels are up 12% from 2007, although he projects it slowing in 2009. The manufacturing sector has improved 45% from 2007 thanks to increased energy needs. The education (higher education) and health care markets have shown steady modest growth. The non-building market (infrastructure and power transmission, most notably) is up 3% from 2007.

The bad news is, of course, the residential real estate market, but the non-residential market (office and retail are both in decline) is also struggling. Sherwood said that while the office market is down only 1% from 2007, "2009 looks bad." He added that 2009 could be the start of the turnaround in the single-family residential market in certain geographic markets.

The biggest issue facing the domestic built environment is access to conventional capital, according to Sherwood. "If you want to follow markets, follow the capital."

In the big picture, the total 2008 construction market is $557.8 million, which is a 12.4% decline from 2007. Interestingly, even though China is the fastest-growing market, through 2010, the United States will remain number one in total construction spending in the world.

If the United States enters into a recession, Sherwood said that McGraw-Hill research indicates that the commercial building market suffers the most. The change in the institutional market is "slight and lagged" because "funding measures don't necessarily run in pace with a recession."

Because much has been made of the increase in foreign investment in the United States, Sherwood faced a question from the audience about how real the perception is. "Right now, the United States is a buy. Large multinational firms with a global presence are enjoying this. You definitely have new players trying to come into this market, but the problem they are having is finding people to do the work."

Interesting stuff indeed.


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