Construction Forecasts

News & Analysis

The Impact of a Recession on the Construction Outlook

09/09/2011 by Bernard M. Markstein, Reed Construction Data Chief Economist

The negative economic news continues to flow. The health of Euro zone finances remains in question. Gold prices hover close to all time highs. The United States economy treaded water in August, netting no new jobs. U.S. consumers are more pessimistic than ever. Private construction spending fell in July.

As noted earlier (Downgrading the Forecast) the poor economic numbers have led us to lower our baseline forecast and to increase our subjective probability of a recession to 30%. Although we continue to be optimistic that the U.S. economy will avert a descent into another recession, the risk is real enough to look at what a recession scenario and its likely impact on construction.

In our recession scenario, the current (third) quarter is subpar, with growth barely above zero. The next four quarters then exhibit decline, with the first and second quarters of 2012 down the most. Fourth quarter 2012 is mildly positive, with stronger growth in 2013.

The impact of our recession scenario on construction spending is felt largely in 2012 and 2013. Although some adjustments may be made this year — mainly delaying projects, a further hit on residential construction and possible cancellation of some federal projects, much of 2011 projects are committed. Comparing our baseline forecast with our recession scenario, in 2012 new residential construction goes from expanding by 6.8% to declining 4.1% and residential improvements go from up 8.7% to down 4.3%. Non-residential building takes a smaller hit, rising only 0.9% instead of 3.3% in the baseline forecast. We expect heavy engineering (non-building construction spending) to feel the pinch more, though not as much as residential construction — falling 0.9% instead of rising 3.6%.

Thus, in our recession scenario total commercial construction falls 1.3% instead of rising 4.8%. Two-thirds of the change is due to reduced spending on residential construction. All categories of commercial construction turn positive in 2013, but because we expect the nation to be struggling out of the morass, not as strong as if there had not been a recession.