PSMJ & Deltek Present The State of the Architecture and Engineering Industry
In a recent Deltek webinar, PSMJ’s Dave Burstein presented his data-rich annual address featuring US economic data and PSMJ survey data to provide an overview on the status of the US economy and current AEC market conditions. David explains exactly why key client markets are behaving the way they are and what you can do to properly position your AEC firm for the changes ahead.
David’s presentation is a rich analysis of a variety of factors impacting project-based businesses today and represents some of the most comprehensive research that has been conducted in the AE industry.
Topics David covers in his presentation are:
- Important trends in the US economy
- PSMJ’s outlook on the AEC industry in 2017 and beyond
- Which AEC markets and submarkets will be up? Which ones will be down?
- What AEC firms should do to position themselves for success
Following is a brief summary of the webinar. To watch the full webinar and hear David’s recommendations <click here>.
Important trends in the US Economy - How is the US Economy really performing?
The US Economy is doing a lot better than you may think. Consider these facts that David shared:
- Of the largest 100 companies in the world, more than half are US companies (53 to be exact). China is a distant second with 10 of the top 100.
- Over 40% of the world’s design business is done by American firms.
- Since the great recession, US companies have outperformed those of other countries
- US firms focused on the domestic market have done best
- Total US Employment is now considerably above what it was pre-recession
- In terms of share of net growth in employment, the US had more than half of the total growth of employment in the world
- If you look at US jobless claims, in terms of % of the US workforce, it’s never been as low as it is now. In fact, we have not had numbers this low since the 1970s, when the working US population was much less than it is today.
Are the US economic gains really going to the top 1%?
Well in fact, some of this is true. Median incomes have stagnated since 1970 and there has been a growing disparity between the upper class and middle and lower level incomes. While this has been true as a long term trend since 1970, in the last couple years we’re seeing this trend turn around.
So with all of this good news, what is there to be worried about?
Even when things are going well, there are things firms need to keep in mind. The Aging population, Excessive Debt, and the Next Recession are three that David highlighted. More detail follows:
The Aging Population
If you look at the “US Elderly Dependency Ratio” which represents the ratio of US wage earners to those in retirement, it’s expected to jump in the next few decades. This means that there will be more people taking their money out of the system and spending it, and fewer people earning it and putting it in. That’s a problem.
But we’re better off than most.
If you compare the US problem to that of Japan, China and the EU, the US is the only place other than the Middle East and Africa with an increasing working aged population (15-64).
Watch webinar now <click here>.
First when talking about US debt, let’s look at the good news:
- The “Fed Budget Deficit” which exploded to 12.1% of GDP in 2009 dropped to 2.5% of GDP in 2015. So in terms of the deficit the US is actually back to where we were prerecession.
- Contrary to popular opinion, federal spending has actually declined. It peaked in 2010 at 25% of GDP and declined to 22.5% in 2015. So spending as a % of GDP has decreased, and that’s one of the reasons the deficit has gone down.
- People’s spending and saving habits have changed. The number of people that “prefer spending” has dropped to less than 35%, and the percentage of people that “prefer to save” has gone up to 65%. Although this is a good thing, it’s actually one of the reasons the recovery has been as slow as it is.
- Looking at Inflation-adjusted household income vs household debt, also paints a pretty good picture. Inflation adjusted household Income has actually increased as household debt has come down from 2010-2016.
- Household assets have also increased while household liabilities have leveled off. So the ratio of assets to liabilities for households in the US has never been better.
So, what’s the downside of this excessive debt?
The US is one of the world’s biggest debtors, and the US Congressional Budget Office is projecting that it’s likely to get worse. The US is the second biggest debtor in the world, second to Japan.
Why is that important?
- It’s important because servicing debt is expensive. If you add up the cost the US is spending on major government programs, the total cost of these programs is less than the annual cost of interest on US debt. And it’s going to get worse; according to the US Congressional Budget Office: In 2015 interest as a % of the US federal budget was 6%, this is projected to more than double to 14% in 2030.
- If the US ramps up spending in conjunction with tax cuts (as the current administration is proposing) we need to be concerned about the debt skyrocketing.
- There’s also a problem at the state and local level. In particularly, state and local pensions are underfunded by trillions. These are promises the government has made to retired employees and are very difficult to get out of.
The Next Recession – so when will it be?
Although we may not know exactly when, there will be another recession. Consider this,
- The average duration between US recessions since 1961 has been 73.5 months. We’re now at 84 months. So by that measure we’re already overdue.
- One of the ways we have traditionally fought recession was through the Federal Reserve raising interest rates. With short and long term interest rates at historic lows, there’s not much room for that.
- One of the things the Feds could do to deal with inflation is called “quantitative easing” (i.e. printing money) and directly funding infrastructure projects. The problem is if you do too much of that (and nobody knows what too much is), you can end up with hyperinflation.
So with all of this data about the US Economy, what does it mean for the AEC industry and how it will fare in 2017 and beyond?
The AEC industry
- Employment in the U.S. AEC sector is back to pre-recession levels. We just hit full employment in the AEC industry in Dec 2016.
- Engineering firms are actually ahead of where they were prior to the recession in terms of numbers of employees. However, architectural and construction firms are lagging behind engineering firms a bit in the recovery.
- According to the U.S. Dept. of Labor Bureau of Labor Statistics, we’ve now recovered. However, a sobering thought is that it only took 2 years of recession to wipe out a quarter of a million jobs and it has taken 6 years to bring them back.
The good news is that profitability in the A&E industry is at an all-time high. So, firms are not only growing but they are becoming more profitable, which is a great combination!
The AEC industry: Where is it going?
No one has a crystal ball, but according to Dave Burstein, if you’re doing strategic planning, follow the advice of hockey great Wayne Gretzky.
“Don’t skate to where the puck is. Skate to where it’s going to be.” WAYNE GRETZKY
This means that when you’re plotting your strategy, don’t look at which markets are hot now. Look at which markets are going to be hot 3 to 5 years from now.
The AEC Markets and Submarkets – What’s Up and What’s Down?
So how do you know what’s going to be hot? According to David Burstein, AE proposals are a leading indicator for the AE industry. Using this as a benchmark, in combination with PSMJ survey data and PSMJ’s “Plus Minus Index” David looked at each of the following AE markets and their submarkets to highlight the upward and downward trends he think we’ll see.
Learn which markets and submarkets David says will be up or down. Watch the webinar now.
David covered each of the following markets in detail and discusses whether they will most likely experience an upward or downward trend:
- Housing Market
Submarkets: Condominiums, Multi-family housing (apartments), Single family homes, Senior and assisted living.
- Commercial Market (Users & Developers)
Submarkets: Retail, Warehouse and distribution, Restaurants, Hotels/motels, Office buildings, Call centers and Data facilities
- Light Industrial Market
Light Industrial submarkets: Component assembly (including telecom) Warehouse/distribution facilities, Repair/service facilities
- Heavy Industrial Market
Heavy Industrial Submarkets: Primary materials manufacturing, Petroleum facilities, Pharmaceutical manufacturing, Chemical plants, Product manufacturing (food, autos etc.)
- Energy & Utilities Market
Submarkets: Renewables, Mining/resource extraction, Power plants, Pipelines, Utility distribution, Telecom/cable
- Water/Wastewater Market
Water/Wastewater Submarkets: Water supply, Water distribution, Water treatment, Wastewater collection, Wastewater treatment, Wastewater reuse
- Environmental Market
Environmental Submarkets: Waste disposal, Wetlands delineation, Site characterization, Site cleanup, Environment permitting, Resource management, air pollution
- Education Market
Education Submarkets: K-12, Laboratories, Support facilities, Higher education
- Transportation Market
Transportation Submarkets: Transportation planning, Roads, Airports, Bridges, Traffic, Rail
- Other Gov’t. Buildings Market
Government Buildings Submarkets: Public safety, Public recreation, Justice facilities, Sports facilities
- Health Care Market
Submarkets: Hospitals, Medical offices, Continuing care facilities, Medical laboratories
Watch webinar now <click here>.
In this webinar, “PSMJ & Deltek Present: The State of the Architecture and Engineering Industry”, PSMJ’s David Burstein provides an excellent overview of the status of the AE industry using many informative charts and graphs. The information he shares shows that things can change really quickly in each of these markets and submarkets. He recommends that AEC firms pay attention and skate not only to where the puck is going to be, but also to be nimble enough to react quickly when things change.
So what should you do with all of this information?
David believes that the war for clients has cooled off, however, the war for talent is heating up. Most firms aren’t having nearly as much trouble getting work as they used to. However, the average number of days to find talent is increasing across the US economy and it’s particular hard in the AE industry. So come up with a game plan to address that.
To learn more about the AE Industry status and how you can stay up on PSMJ’s Quarterly Market Trends, watch the webinar now.
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