Economist Ken Simonson Forecasts Growth, Addresses Labor Concerns

Glass Magazine
October 19, 2016

Total nonresidential construction is expected to continue to growth through at least 2017, according to Ken Simonson, chief economist for the Associated General Contractors of America. Simonson spoke Oct. 19 at the Glazing Executives Forum during GlassBuild America: The Glass, Window & Door Expo in Las Vegas.

Nonresidential construction spending, which increased 5 percent in 2015, is expected to finish out 2016 up 5 to 8 percent year-over-year. Simonson expects growth in the segment to range between 2 and 6 percent in 2017.

“What we hear from contractors is that things are on track, and they expect to stay busy through 2017,” said Simonson to the group of more than 160 attendees. “For 2017, we think we will continue to see growth, though it is likely to taper off.”

Within the nonresidential category, the commercial segment (retail, warehouse and farm) is expected to increase 7 to 10 percent in 2016, and is forecast to increase at a slightly slower 0-to-5 percent rate in 2017, according to Simonson. Office construction, which saw 18 percent gains in 2014 and 22 percent gains in 2015, is expected to finish out 2016 strong as well, with 19 to 22 percent increases in spending. The segment will continue to see growth in 2017, though at a more tempered rate—5 to 10 percent, he said.

“The office segment is up 22 percent in the first half of this year,” Simonson said. “We're still hearing major announcements about new buildings, and this will continue through 2017. However, it’s different than what it was before the recession. We’re not seeing office parks, but more building happening in downtown areas.”

The institutional categories—education and health care—have witnessed several years of slow to moderate growth. This will continue into 2017, Simonson says. Educational construction spending will close out 2016 with 3 to 6 percent gains, and will see 2 to 5 percent increases in 2017. Heath care, which is expected to see gains of just 0 to 3 percent in 2016, will increase an estimated 3 to 8 percent in 2017, he says.

“Education construction was a bigger category before the recession. But, at the state university level, legislatures that were facing huge deficits whacked spending, and the budgets for construction were often cut. University construction is still below where it was,” Simonson says. “The bigger piece is K-12 construction, which also suffered in terms of financing sources. School districts cut spending; bond issues faded and didn’t pass. But now those bond issues are beginning to pass again.”

Simonson expects education spending to improve. However, it will remain below pre-recession levels.

While the construction market will continue to enjoy growth in the coming year, Simonson warns that labor will continue to be a challenge for companies. During the 2009 and 2010, the construction industry saw 1.5 million jobless claims. Today, the number is about 500,000. “This is at its lowest level,” Simonson said. “If someone says they are out of work and looking for work, there is a reason a construction firm hasn’t hired them, because they need workers. … Companies are having to keep jobs posted longer. And, while the industry is hiring people, the people they are hiring are not experienced construction workers.”

Along with hiring challenges, construction firms should also brace for increasing labor costs. Wages are increasing at a 2.6 percent annual rate. “We continue to see that average level of pay go up,” Simonson said. Pay increases are even higher for experienced workers. “If we narrow the average pay increase to people with the experience level that you want, you’ll see much higher total compensation,” he said.

Simonson also noted changing material costs, which could pose challenges for some glazing contractors. Glass costs are increasing, with prices steadily rising at about a 4 percent annual rate. However, aluminum costs have stabilized.

Simonson also addressed concerns about the effect of the 2016 election on construction. “No matter who wins the election, I don’t think construction will be affected directly,” he said. “My forecast assumes that spending put in place next year [corresponds] with something that’s already been ordered. And, I am not detecting any hesitation on the part of owners based on the election. They plan to use these buildings for 20, 50, 100 years. I don’t think waiting two more weeks [until the election] is going to cause them to change their minds.”