Although the national economic recovery is now two and a half years old, construction spending has continued to contract. A multitude of factors prevented a recovery for this beleaguered industry in 2011. Lenders that have been extremely reticent to finance construction projects, budget shortfalls at all levels of government, the ripple effect of overbuilding, depletion of Federal Stimulus funds, a depressed housing market and rising costs of key construction commodities all contributed to a decline in spending in 2011 for nonresidential construction projects.

In June 2011, the American Institute of Architects (AIA) semi-annual Consensus Construction Forecast, a survey of the nation’s leading construction forecasters, projected a 5.6% decrease in nonresidential construction spending in 2011 from 2010, followed by a significant rebound with a projected 6.4% increase in spending in 2012.

A weaker than expected economy led to a revision of this forecast in January 2012, with the Consensus Construction Forecast projecting 2.1% growth in nonresidential construction spending in 2012 and 6.4% in 2013. In short, a modest recovery in 2012.

“This past recession, steeper than any other post-war downturn, also has produced one of the weakest recoveries in recent memory,” said AIA Chief Economist Kermit Baker, PhD, Hon. AIA. “The consensus is that we’re not likely to see marked improvement in the growth of our economy during year three of this recovery.”

The Conference Board, the economic organization that produces the Consumer Confidence Index and other economic indices, forecast 1.8% growth for the U.S. economy in 2011, 1.8% in 2012, and 2.2% in 2013.

“Several segments of construction appear to be climbing out of a hole,” noted Associated General Contractors of America’s Chief Economist Ken Simonson, but cautioned that public construction segments faced stiff spending cuts in 2012.

Baker identified four major factors inhibiting demand in the nonresidential construction market:

1. Lingering financial crisis in key European economies, which could throw the U.S. economy back into recession
2. Homebuilding, typically an engine of growth during the early stages of an economic recovery, has remained as unusually low levels
3. Construction financing continues to be difficult to obtain
4. Energy costs are unusually high, threatening inflation

He also noted several upsides:

1. Corporate profits are strong, resulting in an increase in capital spending
2. Borrowing costs remain at record lows
3. U.S. manufacturing is recovering

Market Segment Consensus Growth Forecast	Forecast % Change
	2012	2013
Nonresidential Total	+2.1%	+6.4%
Commercial Total	+5.6%	+11.4%
Office	+4.3%	+9.6%
Retail/Other Commercial	+5.0%	+9.9%
Hotel	+10.2%	+19.7%
Industrial Total	+6.0%	+10.2%
Institutional Total	-0.1%	+3.6%
Healthcare	+4.5%	+5.3%
Education	-1.7%	+3.1%
Religious	+5.1%	+6.3%
Public Safety	-3.8%	+0.3%
Amusement/Recreation	+0.2%	+6.5%

Source: AIA Consensus Construction Forecast, calculated as an average of all forecasts provided by the panelists that submit forecasts for each of the above building categories: McGraw-Hill Construction, IHS-Global Insight, Moody’s Economy.com, FMI, Reed’s Construction Data and Associated Builders and Contractors.

This construction outlook reviews the year’s top line construction numbers, shows where leading construction and electrical industry indicators are trending, and provides a summary of the latest AIA Consensus Construction Forecast for 2011.

Construction spending trends
As of November 2011, the Commercial Department estimated U.S. put-in-place construction spending (actual numbers, not seasonally adjusted), was about $725 billion. December numbers were not available as of the time of writing, so the author projected approximately $791 billion for the entire year using some simple math, a decline of 1.6% from 2010.

Source: Commerce Department data

Residential construction spending is projected at $247.5 billion for the year, about the same as 2010. Nonresidential construction spending is projected at $543.2 billion, a 2.1% decline from 2010. While public nonresidential construction spending is projected to decline 2.8% in 2011 to $285 billion as Federal Stimulus funds continue to dry up, private nonresidential construction spending is projected to remain about the same.

Source: Commerce Department data

Looking at the top five nonresidential building construction markets, all were projected to decline in 2011 with the exception for the commercial building market:

• Office spending: projected $34.5 billion, 8% below 2010’s $38 billion
• Commercial spending: projected $43.8 billion, 8.1% above 2010’s 40.5 billion
• Healthcare spending: projected $39.8 billion, about the same as 2010 ($39.9 billion)
• Education spending: projected $85.6 billion, 3% below 2010’s $88.2 billion
• Manufacturing spending: $35.7 billion, 6.3% below 2010’s $38.1 billion

Source: Commerce Department Data

AIA Architecture Billings Index
The American Institute of Architects’ (AIA) Architecture Billings Index (ABI) is a leading economic indicator that provides an approximate 9- to 12-month glimpse into the future of nonresidential construction spending activity.

The ABI is derived from a monthly “work on the boards” survey of hundreds of firms. A score above 50 indicates firms overall are reporting an increase in billing activity, which is suggestive of market expansion.

In December 2011, the ABI was 52, the same as November, again reflecting an overall increase in demand for design services. The monthly new projects inquiry index, meanwhile, was 64, down just one point from 65 the previous month.

“We saw nearly identical conditions in November and December of 2010 only to see momentum sputter and billings fall into negative territory as we moved through 2011, so it’s too early to be sure that we are in a full recovery mode,” said Baker. “Nevertheless, this is very good news for the design and construction industry, and it’s entirely possible conditions will slowly continue to improve as the year progresses.”

NAHB/Wells Fargo Housing Market Index
Builder confidence in the market for newly built, single-family homes has remained in contractionary territory for years, as reflected in the NAHB/Wells Fargo Housing Market Index (HMI)

Derived from a monthly survey that NAHB has been conducting for more than 20 years, the HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.”

Throughout 2011, the HMI remained well below the 50-point threshold suggesting business conditions favorable to positive sales growth. However, the HMI began to trend upward starting in October. The year ended with a score of 21, a much more optimistic finish to the year than 2010. Then in January 2012, builder confidence increased for a fourth consecutive month, rising four points to 25, the highest the index has achieved since June 2007.

“Builders are seeing greater interest among potential buyers as employment and consumer confidence slowly improve in a growing number of markets, and this has helped to move the confidence gauge up from near-historic lows in the first half of 2011,” said NAHB Chief Economist David Crowe. “That said, caution remains the word of the day as many builders continue to voice concerns about potential clients being unable to qualify for an affordable mortgage, appraisals coming through below construction cost, and the continuing flow of foreclosed properties hitting the market.”

NEMA Electroindustry Business Confidence Index
Another forward-looking index is the National Electrical Manufacturer Association (NEMA) Electroindustry Business Confidence Index (EBCI) for current North American conditions. This economic indicator gauges business confidence of the electrical industry in Asia, Europe, North America and Latin America, and is based on the results of a monthly survey of senior managers at NEMA member companies, which represent more than 80% of the electrical industry.

The EBCI for current North American conditions slipped to 52 in December 2011 from 56 in November, but nonetheless cleared the 50-point market above which more panelists than not saw an improved business environment.

Confidence in future conditions, meanwhile, climbed 10 points to a seven-month high of 70, its highest level since May 2011, affirming that expectations for the business environment six months from now remain positive.

This construction outlook reviews the year’s top line construction numbers, shows where leading construction and electrical industry indicators are trending, and provides a summary of the latest AIA Consensus Construction Forecast for 2011.

The 2011 American Institute of Architects (AIA) semi-annual Consensus Construction Forecast, published in mid 2010, predicted a marginal increase of 3.1% in inflation-adjusted terms in nonresidential construction spending in 2011.

At the end of 2010, the Forecast Panel revised its predictions, predicting a slower rate of recovery, with 2011 spending levels not anticipated to be enough to show growth over 2010, despite modest improvements in the overall economy.

Even though the national economic recovery is now a year and a half old, it has not gained much traction. The housing and employment markets remain weak. There are some positive signs, however; the fall of 2010 saw healthy growth in manufacturing and consumer spending, and bank lending restrictions appear to be easing. ScotiaBank Group predicts a healthy growth rate of 2.7% in 2011 and 2.9% in 2012 for U.S. gross domestic output (GDP).

The nonresidential construction market was mired in a steep downturn in 2010 due to an oversupply of facilities in most construction categories, weak demand for space, continuing declines in commercial property values and reluctance among real estate lenders to provide credit.

“The key factors that have prevented an accelerated recovery include historically low lending rates for real estate projects, the lingering effects of general overbuilding and an unfavorable bond market that has hampered the ability for municipalities to get the requisite funding to build new schools and hospitals,” says AIA Chief Economist Kermit Baker, PhD, Hon. AIA. “Conditions should improve later this year and gain momentum as we move into 2012, particularly for hotel, retail and office building projects.”

The semi-annual Consensus Construction Forecast is based on a survey of the nation’s top construction forecasters, including McGraw Hill Construction, Global Insight, Moody’s Economy.com, Reed Business Information and FMI. The purpose of the Forecast Panel is to project business conditions in the construction industry over the coming 12-18 months.

While activity for institutional projects should hover near 2010 levels, there is likely to be a modest decline in commercial construction in 2011, according to the Panel. Overall nonresidential construction spending is expected to decrease by 2% for the year.

“The nonresidential construction market is expected to recover this year, but late enough in the year that spending levels are unlikely to see any growth over 2010 levels,” Baker points out. “A consensus 2% construction spending decline in 2011 will hopefully indicate the bottom of the recession trough and set the stage for a recovery in 2012.”

“Most market drivers are now neutral or positive,” writes Jim Haughey, RCD Chief Economist at www.reedconstructiondata.com. “Commercial construction starts have stabilized well above the cyclical low point in June 2009. The starts trend was clearly upward from the beginning to the end of 2010. Starts are refilling the pipeline and will lead to slow growth in spending at commercial jobsites beginning around yearend.”

In the institutional market, Haughey says market drivers are weakening due to government funding for construction coming down after remaining strong during the early part of the recession. “But the spending decline for institutional projects will be moderate because emergency Federal funds, while no longer growing, remain substantial,” he points out.

The Forecast Panel believes 2012 will produce stronger gains.

“Overall building construction should rise around 5%, with growth twice that rate for the more cyclical commercial sector,” Baker adds.

Market Segment Consensus Growth Forecast	2011	2012
Overall Nonresidential	-2.0%	5.0%
Commercial/Industrial	-4.2%	10.9%
Hotels	-6.2%	15.6%
Office	-7.9%	7.1%
Retail	-1.0%	10.9%
Industrial	-11.8%	5.8%
Institutional	-0.2%	1.6%
Amusement/Recreation	1.4%	1.2%
Education	-3.1%	1.7%
Religious	1.3%	3.4%
Public safety	-6.7%	-2.3%
Healthcare	1.1%	5.5%

Construction spending trends
As of November 2010, U.S. put-in-place construction spending, estimated by the Commerce Department, was headed toward a total projected value of about $822 billion for 2010, 9.4% below 2010 and 30% off its most recent peak of $1.17 trillion in 2006. (As December and full year numbers were not available at the time of writing—having a two-month lag—all projections for December and subsequently full year 2010 is based on some simple math by the author, providing a rough estimate.)

Residential put-in-place construction was headed towards a projected value of about $246 billion, about the same as 2009, suggesting the market has bottomed out after losing 60% of its value from its most recent peak of $613.7 billion in 2006.

Nonresidential construction increased from 2005 to 2008 but began a steep decline, ending 2010 at a projected $566.6 billion, 13% lower than 2009 and 20% off its peak of $709.8 billion in 2008. The damage would have been much worse in this market if not for the Federal Stimulus, which boosted public spending. The traditionally more volatile private nonresidential building construction market was headed towards a projected value of $264.8 billion, 23.6% below the $346.7 billion spent in 2009 in this market, and 35% off its most recent peak of $408.6 billion in 2008. Bolstered by American Recovery and Reinvestment Act of 2009 funds, the traditionally more stable public nonresidential building construction market was headed to projected total spending of $301.7 billion in 2010, 2% below 2009’s $307.5 billion.

Looking at the top five nonresidential markets, all were projected to suffer steep declines in put-in-place construction spending in 2010, based on Commerce data, as private construction spending continued to collapse and public construction spending began to soften as Stimulus funding was used up:

• office spending: projected $38 billion, 28% below 2009’s $52.7 billion
• commercial spending: projected $41.5 billion, 25% below 2009’s $55 billion
• healthcare spending: projected $40 billion, 11% below 2009’s $45 billion
• education spending: projected $89.7 billion, 13% below 2009’s $102.9 billion
• manufacturing spending: projected $39.5 billion, 33% below 2009’s $58.5 billion

AIA Architecture Billings Index
The American Institute of Architects’ (AIA) Architecture Billings Index (ABI) is a leading economic indicator that provides an approximately nine- to 12-month glimpse into the future of nonresidential construction spending activity.

The ABI is derived from a monthly “work on the boards” survey and produced by the AIA Economics & Market Research Group. Hundreds of firms are surveyed and the percent reporting a significant increase in billings during the previous month is added to half the percent of those reporting no change, resulting in a score. A score of 50 means an equal percentage of firms are reporting an increase as a decrease. A score above 50 indicates that firms overall are reporting an increase in billing activity, which is suggestive of market expansion.

In December 2010, the ABI jumped more than two points to 54.2, reflecting an increase in demand for design services, after being stuck near the 50 level for the previous six months. While December is historically the most unpredictable month from a business standpoint—and therefore the most difficult from which to interpret a trend—the $20 billion architecture community has not been this optimistic since December 2007. The new projects inquiry index, meanwhile, was 62.6, up slightly from a mark of 61.4 in November.

“This is more promising news that the design and construction industry is continuing to move toward a recovery,” said AIA Chief Economist Kermit Baker, PhD, Hon. AIA. “The coming quarter will give us a much better sense of the strength of the apparent upturn in design activity.”

That recovery, however, again is not expected by Baker until at least the second half of 2011.

“Architecture firms are not expecting such an upturn to be very strong,” he adds. “A December 2010 survey of architecture firms found that expected growth in billings for 2011 is quite low. Overall, firms are expecting revenue gains of just 1% for the year.”

NAHB/Wells Fargo Housing Market Index
Builder confidence in the market for newly built, single-family homes remained in contractionary territory throughout 2010, according to the National Association of Home Builders/Wells Fargo Housing Market Index (HMI).

Derived from a monthly survey that NAHB has been conducting for more than two decades, the HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.”

Throughout 2010, the HMI remained well below the 50-point threshold suggesting business conditions favorable to positive sales growth, and ended the year with a score of 16.

“The steady but low level of the HMI reflects the fact that builders and consumers have yet to see consistent signs that the economy is improving,” says NAHB Chief Economist David Crowe. “The good news is that the index and its subcompartments remain above recent lows from the earl fall. NAHB expects an improving job market this spring will help prospective buyers feel more confident and propel more sales activity in 2011. However, the continued problems that builders are facing in obtaining construction credit and accurate appraisal values could significantly slow the onset of the housing recovery.”

NEMA Electroindustry Business Confidence Index
Another forward-looking index is the Electroindustry Business Confidence Index (EBCI) for current North American conditions, produced by NEMA. This economic indicator gauges the business confidence of the electrical industry in Asia, Europe, North America and Latin America, and is based on the results of a monthly survey of senior managers at NEMA member companies, which represent more than 80% of the electrical industry.

The EBCI climbed for a second consecutive month in December 2010, rising 5.5 points to 68, its highest level since June. A reading above 50 indicates more panelists than not reported conditions improved during the month. Forty percent of survey panelists reported improved conditions in December, while only 4% reported deteriorating conditions. The intensity of change in current North American conditions also edged higher in December increasing to +0.4 from +0.3 the previous month. Panelists were asked to report intensity of change on a scale ranging from –5 (deteriorated significantly) through 0 (unchanged) to +5 (improved significantly).

The EBCI for future North American conditions, meanwhile, rose for a fourth straight month in December. The index reached 78, its highest mark since well before the severe recession of 2008-09, and was up a cumulative 24 points since August 2010.

NEMA Lighting Systems Index
Looking specifically at the lighting segment, NEMA tracks the industry’s health using a metric called the Lighting Systems Index (LSI), a composite measure of NEMA member companies’ U.S. shipments of lighting products such as lamps, ballasts, fixtures and emergency lighting and exit signs. Product shipments data are drawn from statistical surveys conducted regularly by NEMA and are adjusted for inflation and regularly recurring seasonal fluctuations.

The Q32010 LSI, released in November 2010, increased 0.9% in the third quarter of 2010 compared to the second quarter and increased 5.6% on a year-over-year basis. The LSI trended has trended higher since hitting a cyclical (and all-time) low during the second quarter of 2009, but aggregate lighting equipment demand remains at a low level.

In terms of the underlying mix of lighting systems products, growth was scattered across all five covered lighting product groups, according to NEMA, but only fluorescent ballast shipments registered anything resembling an appreciable increase in demand from a year earlier.

“Significant weakness in both the residential and commercial markets continues to hamper demand for lighting equipment,” Brian Lego, director of economic analysis for NEMA, wrote on the association’s website in November 2010. “Until construction begins to rebound, replacement demand will likely account for the vast majority of sales of nonresidential lighting equipment over the near term; in addition, retrofits will constitute a sizable share of demand as companies switch out non-compliant or higher-cost lighting systems. Consequently, the LSI will likely see modest gains through 2011.”

Bright spot in down times: The green construction market
The down nonresidential market may have a bright spot: demand for sustainable design. According to McGraw-Hill Construction’s Green Outlook 2011: Green Trends Driving Growth, the U.S. green building market is accelerating at a dramatic rate. The value of green building construction starts was up 50% from 2008 to 2010—from $42 billion to $55-71 billion—and represented 25% of all new construction activity in 2010. According to projections, the green building market size is expected to reach $135 billion by 2015.

In nonresidential building, the green building market share is even higher than the overall market. Today, a third of all new nonresidential construction is green—a $54 billion market opportunity, according to McGraw-Hill. In five years, nonresidential green building activity is expected to triple, representing $120 billion to $145 billion in new construction (40%-48% of the nonresidential market) and $14-18 billion in major retrofit and renovation projects.

To break it down further, health care construction this year is expected to grow its green share to as much as 40% (valued at $8-9 billion in 2010)—phenomenal growth in just two years. Education (valued at $13-16 billion in 2010) and office green construction (valued at $7-8 billion in 2010) also remain strong sectors, showing high increases in market share, due in part to the fact that bigger projects are the most likely to “go green.” This year, the U.S. Green Building Council’s LEED specification is mentioned in 71% of all projects valued at over $50 million.

Green building is the bright spot in an otherwise tough economy, and in some sectors, that rate of growth has been remarkable. “It’s an amazing area of opportunity at a time when the construction market is extremely challenged,” says Harvey M. Bernstein, vice president, Global Thought Leadership and Business Development, McGraw-Hill Construction. “In today’s economy, firms that specialize in green or serve this market are seeing a tremendous advantage— and they’re doing good at the same time. Green building leads to healthier places for us to live and work in, lower energy and water use, and better profitability.”

According to the Green Outlook 2011 report, building owners cited three business benefits as the main drivers for building green:

• Reduction in operating costs of 13.6% on average for new buildings and 8.5% for retrofits;
• Increase in building values of 10.9% for new buildings and 6.8% for retrofits; and
• Increase in return on investment (ROI) of 9.9% for new buildings and 19.2% for retrofits.

Beyond these bottom-line advantages, McGraw-Hill Construction attributes green building’s rapid expansion to owners’ desire for market differentiation, growing public awareness, and an increase in local and federal government regulations. As of September 2010, green building legislation and initiatives were present in 12 federal agencies and 33 states, and the proliferation of local government initiatives have increased at an especially impressive pace—from 156 localities in 2008 to 384 localities in 2010.

The United States suffered its worst recession in 70 years following the collapse of the housing market. The good news is some economists believe the economy began to recover in Q309 after hitting bottom in the second quarter. The Manufacturers Alliance/MAPI Quarterly Economic Forecast predicts that inflation-adjusted GDP declined in 2.5% in 2009 but is in the process of rebounding to 2.4% growth in 2010 and a robust 3.5% in 2011.

Unfortunately, recovery in the construction market will lag the overall economic recovery, and this recovery is threatened by tight lending conditions and continuing high rates of unemployment. There are two bright spots. First is that the residential single-family construction market is expected to enjoy a mild recovery in 2010 after almost four years of deep declines in spending. Second is the Federal stimulus kicked in during 2009, and while a good portion of the spending focused on infrastructure, a fair portion was also spent on public building construction, resulting in public nonresidential construction enjoying growth in 2009.

The bad news is the private nonresidential construction market is in “freefall,” in the words of one construction economist, with every building market suffering, and with tight credit making conditions worse by causing higher-than-normal delays and cancellations. It is not surprising, therefore, that a number of leading electrical and construction industry economic indicators ended the year on a pessimistic note, signaling a weakening business environment.

Overall, nonresidential spending is expected to decrease by 13.4% in 2010 in inflation-adjusted terms, according to the AIA Consensus Construction Forecast, before recovering with 1.8% growth in 2011. Meanwhile, office vacancy rates are closing in on their highest levels since the dot-com industry’s implosion, and sharp declines in international trade, manufacturing output and wholesale inventories have pushed industrial vacancy rates to new all-time highs, which will both lessen electrical product replacement sales and limit retrofit opportunities.

This construction outlook reviews the year’s topline construction numbers, examines the directions that leading construction and electrical industry indicators are pointing, and provides a summary of the latest AIA Consensus Construction Forecast for 2010.

Total construction

As of November 2009, construction spending was being estimated by the Commerce Department at a seasonally adjusted annual rate of $900.1 billion, 13.2% below the same period in 2008 and a six-year low. During the first 11 months of 2009, construction spending amounted to $868.9 billion, 12.7% below the $994.9 billion for the same period in 2008. (As an informal personal estimate, the value of total U.S. lighting sales has traditionally trended at 1.5-2% of the value of construction, which would put the current value of lighting sales at about $14-18 billion.)

Nonresidential construction

As residential construction spending plummeted in recent years, nonresidential construction surged, acting as an offset. Tight credit and weak demand for new facilities generated by the financial crisis and subsequent recession, however, took their toll on this market in 2009 and continue to dampen its prospects in 2010.

As of November 2009, nonresidential construction was running at a seasonally adjusted annual rate of $641.2 billion, 10.9% below November 2008. Most of these losses were in the private nonresidential construction market, while public nonresidential construction continued to demonstrate some growth. In November 2009, private nonresidential construction was estimated at a seasonally adjusted annual rate of $330.5 billion, 20.6% below the $416.4 billion figure estimated in November 2008. Public nonresidential construction was estimated at $310.7 billion in November 2009, a 2.5% increase over the November 2008 estimate of $303 billion.

“Private nonresidential construction is in freefall, with every category except private power construction down sharply compared to a year ago,” says Ken Simonson, chief economist for the Associated General Contractors of America (AGC). He notes that public construction has benefitted from Federal stimulus funds, but predicted these gains will continue to be tempered by sharp cutbacks in projects funded directly by states, local governments and school systems.

“Tight credit continues to cause cancellations and delays,” notes Heather Jones, construction economist, in FMI Corporation’s Construction Outlook, 4th Quarter 2009 Report. “Project delays continue to be four times the normal rate and are currently at 20% (up from three times in 3Q08). Project cancellations are five times the normal rate and are currently at 10% of backlog (doubled from 3Q08). Credit is expected to remain tight throughout 2010, and delays and cancellations are likely to increase.”

As of November 2009, the nonresidential market’s biggest winners were public office (+9% over November 2008), commercial (+19.8%) and healthcare (+12.2%). The biggest losers were private lodging (-46%), office (-39%) and commercial (-40.5%). Public education construction spending was holding somewhat steady (-2.5%) at $83.5 billion.

“The stimulus is finally beginning to have a measurable, but limited, impact on the construction industry,” says Stephen E. Sandherr, CEO of the AGC.

Residential construction

As of November 2009, private residential construction was estimated at a seasonally adjusted annual rate of $250.7 billion, a 19.2% decline from November 2008—and 62% below the 2005 high of $664.2 billion and its lowest point since 1995.

“The residential construction market has been decimated,” writes FMI’s Jones. “For housing starts, 2009 was the worst year since we began keeping records in 1959.”

She adds that this market is expected to begin a recovery in 2010, noting in FMI’s Construction Outlook, 4th Quarter 2009 Report:

• Single-family put in place construction will recover more slowly than single-family starts, the reason being the average size and cost per new home is declining under pressure from tight credit conditions and of course the recession.

• Multifamily construction will continue to fare poorly due to tight credit conditions.

• Residential improvements will increase in 2010 as homeowners make necessary repairs due to building age and invest in improvements over moving up.

“From an affordability standpoint, rarely has there been a better time in history to purchase a home, thanks to record low interest rates, attractive prices and of course the recent extension and expansion of the home buyer tax credit,” says Joe Robson, chairman of the National Association of Homebuilders (NAHB) and a homebuilder from Tulsa, OK. “However, builders are not seeing the full impact of these conditions on buyer demand, partly because awareness of the latest incentives is still building, and partly because of concerns about job security and other economic woes.”

“This is shaping up to be a bumpy recovery period for the housing market,” says NAHB Chief Economic David Crowe. “While some families may be just starting to factor the expanded tax credit into their potential home buying plans, many are hesitating because of the poor economy. At the same time, tight lending conditions for both consumers and homebuilders continue to pose considerable obstacles on the road to a sustained housing and economic recovery.”

AIA Architecture Billings Index

To find out more about what is likely to happen in the nonresidential construction market in 2009, we can ask architects—or rather, the American Institute of Architects (AIA) can.

Architects’ billings are a good indicator of future construction activity, expressed via the Architecture Billings Index produced by the AIA. The ABI is derived from a monthly “work on the boards” survey and produced by the AIA Economics & Market Research Group. As a leading economic indicator of construction activity, the ABI reflects the approximate 9- to 12- month lag time between architecture billings and construction spending.

In December 2009, the ABI ended the year with a score of 43.4. While 2009 ended better than it started (with a 33.3 ABI score), indicating a higher degree of optimism in the $20 billion architectural community, it still ended in negative territory; a score above 50 indicates an increase in demand for design services (billings), and the ABI has not reached or exceed a 50 score since January 2008. The new projects inquiry score, however, was 55.3.

“The main impediment to an economic turnaround for the design and construction industry remains frozen credit markets. We continue to hear that there are numerous viable projects out there awaiting financing,” says AIA Chief Economist Kermit Baker, PhD. “And the longer this situation persists, the more dire the news for the architecture profession which is struggling at unprecedented proportions.”

NEMA Electroindustry Business Confidence Index

Another forward-looking index is the Electroindustry Business Confidence Index (EBCI) for current North American conditions, produced by NEMA. This economic indicator gauges the business confidence of the electrical industry in Asia, Europe, North America and Latin America, and is based on the results of a monthly survey of senior managers at NEMA member companies, which represent more than 80% of the electrical industry.

The EBCI began 2009 with a score of 20, but optimism improved most of the year, signaling a steady strengthening of the business environment facing the electrical manufacturing industry. The EBCI topped 50 in August and stayed above 50 until dipping 5.7 points to 48.2 in December, indicating modest deterioration in the business environment at the end of the year.

On the other hand, the EBCI for future North American conditions rebounded in December following declines in each of the two previous months. At 64.3, the index posted its tenth straight reading above 50, with a 6.3 point gain relative to November suggesting the degree of anticipated improvement in conditions over the next half year increased in the latest month.

NEMA Lighting Systems Index

Looking at the lighting segment, NEMA tracks the industry’s health using a metric called the Lighting Systems Index (LSI), a composite measure of NEMA member companies’ U.S. shipments of lighting products such as lamps, ballasts, fixtures and emergency lighting and exit signs. Product shipments data are drawn from statistical surveys conducted regularly by NEMA and are adjusted for inflation and regularly recurring seasonal fluctuations.

The LSI increased 3.3% in the third quarter of 2009 compared to the second quarter—its first increase in nine quarters. Nonetheless, the LSI was only one quarter removed from its lowest reading on record and declined 19.3% on a year-over-year basis.

After adjusting for seasonal influences and inflation, emergency lighting equipment was the only index component to see shipments weaken compared to the second quarter of 2009; however, every category experienced a decline in shipments on a year-over-year basis, with light fixtures suffering the biggest drop-off compared to Q32008.

Associated General Contractors

The Associated General Contractors of America (AGC)’s business outlook forecast, based on survey responses from nearly 700 construction firms, found that 88% of contractors believe there will be no recovery for the construction industry in 2010.

“They aren’t predicting a turn-around because few contractors expect privately funded construction projects, which typically account for the bulk of annual construction activity, to improve,” says Sandherr of AGC.

Sixty-four percent (64%) expect demand for new manufacturing facilities will decline, while 71% expect demand for new retail, warehouse and lodging facilities to drop. As a result, the number of firms expecting to buy new equipment is down to 46% this year from 61% in 2009. Meanwhile, 81% report already having to cut profit margins in their bids just to stay competitive and another 10% say they are now submitting bids so low they will actually lose money on the projects. Nearly three out of four (73%) firms said they laid off employees in 2009, average 39 layoffs per firm, while 60% are currently unsure whether they will be able to add new staff or be forced to make further cuts, signaling a great deal of uncertainty.

“Construction spending declined last year by $137 billion, and is now at the lowest level in six years,” Sandherr points out. “And while only 5% of the U.S. workforce, construction workers shouldered 20% of non-farm layoffs last year. As the latest federal employment figures make clear, the depression-like conditions in the construction industry are one of the main factors dragging on overall employment.”

One relatively bright spot is the Federal stimulus. Thirty-one percent (31%) of contractors say they were awarded stimulus-funded projects. Of these, 46% say the stimulus helped them retain an average of 24 employees each. Another 15% say the stimulus helped them to add an average of 10 new employees per company while 12% cite the stimulus as driving new equipment purchases. Fifty-five percent (55%) say work on public buildings will improve or remain stable in 2010. Additionally, 57% expect growth or stability in demand for hospital and higher education construction.

“Unfortunately for the industry and for our economy, this year’s construction outlook is far from positive,” says Sandherr. “As long as the construction industry remains mired in its own depression, broader economic and employment growth will continue to lag.”

NAHB/Wells Fargo Housing Market Index

Builder confidence in the market for newly built, single-family homes improved in 2009 compared to 2008’s record lows caused by recession and ongoing flow of foreclosed homes onto the market, but remained pessimistic, according to the National Association of Home Builders/Wells Fargo Housing Market Index (HMI).

Derived from a monthly survey that NAHB has been conducting for more than two decades, the HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.”

Throughout the 2009, the HMI remained well below the 50-point threshold suggesting business conditions favorable to positive sales growth, and ended the year with a score of 16, its lowest point since June.

“Home buying conditions have rarely been as good as they are right now, but consumers are still waiting to see significant positive signs of improvement in employment and confidence, and this is slowing buyers’ return to the market,” says NAHB’s David Crowe. “Meanwhile, competition from foreclosed homes is also severely impacting new-home sales. That said, expected improvement in the job market this spring will help propel the housing recovery as we head into the prime home buying season.”

The AIA Consensus Construction Forecast

As the overall economy continues to struggle, nonresidential construction spending is expected to decrease by 13.4% in 2010 in inflation-adjusted terms, according to the AIA Consensus Construction Forecast, before recovering with 1.8% growth in 2011.

This semi-annual forecast is based on a survey of the nation’s top construction forecasters, including McGraw Hill Construction, Global Insight, Moody’s Economy.com, Reed Business Information and FMI.

The purpose of the Forecast Panel is to project business conditions in the construction industry over the coming 12-18 months. Interestingly, the Panel forecasted a 11% decline in nonresidential construction spending in 2009, and as of November 2009, was spot on.

The 2010 outlook is fairly bleak across the entire nonresidential market, with no winners. Industrial/commercial projects, including office, industrial and retail projects, however, will see the most significant decreases in activity.

“The long-awaited economic recovery seems to be well underway, and even the residential construction sector looks like it has hit bottom and is moving back up after almost four years of deep declines,” writes the AIA’s Kermit Baker. “Nonresidential construction, unfortunately, is still mired in a steep downturn.”

Click here to see the complete report from AIA.