Are We Turning the Corner in the Economy? We Ask Richard Branch

Host:

Welcome to another edition of Engineering Influence, a podcast from the American Council of Engineering Companies. Today. We’re very pleased to welcome back to the program Richard Branch, Chief Economist with Dodge Data and Analytics to talk about the economy. Richard was on last month, and it was a very popular show talking about the macroeconomic situation in America, and given the fact that we’re into June, and it seems like every month seems to be a different year in 2020, we wanted to have him back on. Richard, thank you again for coming back on the show.

Richard Branch :

A pleasure to be here. Thanks again. It was great to hear that people found hearing from an economist and in this day and age a positive thing. So, so that’s certainly a good news.

Host:

Yeah, it’s not exactly the dismal science anymore this time. More people want to know what’s happening and I really want to start out the conversation because, you know, we’re recording this on Friday, the 5th of June and today, the Labor Department came out with some surprising numbers. They found that the unemployment rate actually decreased a slight bit. We actually had job creation of 2.5 million jobs in May, which outperformed a recent survey by economists at Dow Jones who actually anticipated a drop in employment by 8.3 million jobs. So we have a 13.3% not wonderful unemployment rate, but it’s better than we expected. Then we have other news, the airlines are starting to expand capacity. The theme parks in Florida, for example, Universal is opening. Disney’s going to be opening. It seems like we’re turning a corner. Is that, is that too much wishful thinking or what are you seeing right now?

Richard Branch :

Okay. I think when we look back on this crisis, May will have turned out to be the low point. And I think today’s numbers are just an indication that we’re now in the recovery phase. It happened a little bit earlier than we had anticipated. We had figured that job creation would start again in June. But as you mentioned, the main numbers coming in at plus 2.5 million, a huge upside surprise, and as state and local areas continue to reopen and loosen those rules on, on business activity and whatnot hiring we’ll certainly keep moving forward. But not to be a wet blanket on today’s number. But you know, between March and April, we lost well over 21 million jobs. So today’s addition, certainly a positive step, particularly in the construction industry, the construction industry added back 464,000 jobs this morning following a million job loss in April. So you know, that that recovery though is going to be a very long and slow process and it just fraught with pitfalls. You know, the easy lifting will come first with, with those huge negative numbers in April that the big changes will come early. But once we get we continue to think that once we get into the back half of this year, that that growth will continue to move forward, but at a pretty slow pace.

Host:

Yeah. And it’s interesting because we just recently launched a research Institute, which was a separate arm of ACEC, and they’ve been doing some business impact surveys since really the beginning of the COVID-19 pandemic….tracking different indicators. And our most recent survey came back end of last week. And it showed that one fourth of our firms that were surveyed roughly 22% of respondents reported having business areas that are outperforming now, which is a significant increase from April. And they’ve seen some growth in the COVID-19 area of business, healthcare and the like, it seems like it’s turning that corner. But as you mentioned, you know, at large recovering from this is not going to be an overnight kind of thing. It’s gonna be a building process. Do you think that it’s extending know a little bit further into 2021? Or do you think that we might be able to see a little bit of a, you know, recouping some of our losses before the end of the calendar year?

Richard Branch :

I think overall for the economy I think obviously the economy will contract this year. You know, we’re still looking at a potentially 20 plus percent decline in GDP in the second quarter. That will be difficult to make up in the second half of the year. In terms of employment, you know, it’s probably not going to be until mid to late 21 or possibly into early 20, 22, when we start seeing all the jobs that we’ve lost in March and April added back. In terms of construction, I think it’s, it’s, it’s a mixed bag. I think there will be some sectors that will absolutely outperform and surprise on the upside and, and potentially getting back to by the end of the year, getting back to levels that we’ve seen prior to the crisis. But, you know, I continue to think that this will be, you know, one of the big questions is, is what’s the shape of recovery, you know, and it’s what letter of the alphabet are you going to choose to define that shape? The L the w the V a I think a V shape recovery here, even with today’s job numbers is still asking a lot. I think that’s, that’s a big uptick,

Host:

Maybe a W….

Richard Branch :

Could be potentially a w – the one that I’ve heard recently that I enjoyed was the Nike swoosh.

Richard Branch :

That, you know, the slope would be fairly sharp on the upside, you know, where we are now adding those jobs back quickly, but, but then as time goes on, that curve starts to flat now, and all of this is of course pending any future fiscal stimulus. So in our forecast, we we’ve included no future fiscal stimulus programs, even though they’re likely to come. It, it just, you know, we need to see something that has a pretty good chance of passing through the House, the Senate and, and receiving presidential approval. So should there be fiscal stimulus, you know, a phase four phase five of five, six, that could certainly alter that trajectory in that shape of recovery, but barring fiscal stimulus, further fiscal stimulus that, that recovery in the second half of the year will be slow.

Host:

And I think that what you just said kind of reflects the thinking of our membership, because one of the questions that we asked in that survey was essentially, you know, what sector do you think is going to recover first? And it was really a, it was a split decision. I mean, there there’s, there’s no agreement on whether the private sector, the public sector, when it, when it comes to engineering, design, construction is going to recover. You know, we had essentially… yeah, roughly, you know, it was kind of 50 50. Is there anything in, in, in your research that would indicate one sector recovering earlier than the other? Does it, is it still too early to tell? I know that, you know, Congress has something to say about this, about exactly what’s going to be in that next if we do have one phase four stimulus you know, what are your thoughts on, on who’s going to get there first?

Richard Branch :

I think it’s, that’s a very nuanced conversation because I don’t think it’s broad based that public will do better than private or private will do better than public over the next several months. I do think that certain areas of private construction have the ability to bounce back quicker than others. You know, single fam is certainly outperforming expectations warehouse construction especially those big eCommerce fulfillment sites, I think have a potential significant upside data centers, but other sides of public or private construction, or are going to suffer. Retail. Hotels. And then even the office sector, the speculative side of the office sector, it seems the trend now that we’re a month or two into this crisis the trend towards working from home seems to be continuing in terms of, you know, I just within the past couple weeks, Facebook and Twitter have essentially announced plans that they’re going to incentivize workers to stay at home..

Host:

And Facebook is going to index salary to the areas where the people live. Exactly. Which is even more interesting because, you know, then that way that’ll keep some people in those higher – those more expensive areas. Yeah. I guess this is the kind of thing that’s going to be fueling academic papers for a while.

Richard Branch :

Yes.

Host:

I, I doubt that there was a handle and, and, and, and on exactly how much of an impact and how lasting an impact the shift to remote work and just the way that people are going to be interacting with the built environment. It’s really hard to write policy now for something that we just don’t know what the impacts are going to be. And I would imagine from the, financial analytical side, and then also from just the economic side, it’s hard to get a handle on exactly what that impact’s going to be long term.

Richard Branch :

Absolutely. You know, that the office market has gone through such undulations over time. You know, from, from everybody back in the old days, you know, everybody having their own office too, be more open space environments and, and the beginning of the gig economy and people working from home more and telecommuting and whatnot to now this, I think, well, that is a potential downside. I do think there’s, there’s some upside there as well in terms of design elements and improving office design and air circulation and air handling and whatnot. So you know, I think even in that downturn, or even in that systemic shift in an office market, I still think there is incredible potential there for construction.

Host:

For the industry right now, you know, Congress is in the midst of handling a number of issues, but one of the things that continues to move at least in the Senate and now in the house, cause this week Chairman DeFazio released his concept – his surface transportation bill and any set a date, he said, July is when he wants to have a floor vote, which would be very wishful. You know, fast-tracked kind of wishful thinking because you’re just given schedule, but how important would getting a surface bill, a longterm surface bill be to the industry you know, what kind of impact do you think that would, would have either speculative just kind of injecting some confidence back into the economy and then just the real dollars and cents project work.

Richard Branch :

It’s critical. It provides not only the clarity to state and local areas in terms of future funding, but of course there’s just a huge positive force in terms of injecting dollars into the system. I was just this morning reading a report that ARTBA but put out the American Road and Transportation Builders Association, and their research found that in fiscal year 2018, they estimate that States were able to take 30 point $8 billion in federal highway funding and translate that into $66 billion in actual highway improvements.

Richard Branch :

So taking some federal money, lumping it with the States. And so there’s a huge multiplier there. So that might be limited in the cycle, just with the pressure that state and local areas are feeling in terms of revenues and whatnot in this crisis. But it just goes to show that that getting that low hanging fruit of the reauthorization of the FAST Act through as quickly as possible is a necessity yeah. In terms of the construction industry.

Host:

Yeah. And as we mentioned yet, I think last time we kind of talked about the whole concept of shovel ready and, and how that, you know, the approach – It appears the Congress is taking now what you know is more thoughtful and longterm than looking at the immediate payoff of saying, okay, well, we’re going to put X amount of money of stimulus and we’re going to create, you know, these immediate jobs. The longterm infrastructure investment would create that sustained job growth and kind of extend that multiplier. And, you know, I guess for any of the policy people out there who listen to our podcast, we try to get them to listen by sending it to them as much as possible, what message would you give to them as they put together kind of a proposal for a longterm infrastructure bill?

Richard Branch :

Think big. This is not a time in our opinion to quibble over dollars and cents even with today’s job numbers, even with the positive trend in initial claims you know, this is, this is a time to, to dig in with the construction industry and get projects moving. And you know, there, there will be issues of course, over the longer terms in terms of debt and whatnot with the U S economy, but people are out of work. The construction industry is, is a great litmus to get that economy moving again, especially as state and local areas that are suffering and, and so think big and get it done sooner rather than later.

Host:

Absolutely. Well, is there anything else going on from your world, from your perspective that, that are listeners should know about now? Or is it, is it just kind of pay attention to the news and keep abreast on what’s what’s going on?

Richard Branch :

Sure. Well, I think when we spoke last and I can’t recall if we had released our April construction starts data yeah. At that point. But our April data for construction activity was as suspected. It was pretty weak in total construction starts, fell close to 25% from March to April, it does look like as we look at the May data and we’re still cycling through that, the quality control aspect of it. But it does look like the May data we’ll show a slight increase in nonresidential building construction activity from April to May. So again, another sign that the potential that the bottom of this cycle was probably in May, and just this morning, we released our leading indicator of construction, the Dodge Momentum Index, which was essentially flat compared to April. So these are projects when they first enter the very earliest stages of planning for nonresidential building. It was essentially flat in mid April. So I’ll take that as a good sign. You know, back in the recession, the Great Recession, I guess we have to call it just to differentiate it. Back in the Great Recession, the DMI fell sharply and over a long period of time. Yeah. So far over the last couple of months, the DMI is only down by about 10 or 12%.

Richard Branch :

So it shows us that there are still a lot of projects early in the pipeline for a nonresidential building. So again, a positive note that as the economy starts to reopen and as rules on construction are relaxed that there are a lot of projects in the pipeline ready to move forward.

Host:

Yeah. And that’s good. And that, again, for any of our members listening for anyone listening, you can access those indices and the reports at construction.com and the really good detailed information to have if you’re a business leader or you’re someone interested in the sector the data that you have up on that site and that Dodge produces is extremely useful. So I encourage people to go and check that out.

Host:

Well, I do appreciate you coming back on the show, Richard, because it’s always good to do a, do a check in, especially when you see all these, you know, these numbers flying around and you get an unexpected jobs figures in the midst of a pandemic and everything else going on to kind of get an update and see where things are. And I do hope to have you on again, in a couple of in a couple of weeks to see if anything’s changed.

Richard Branch :

You’re right. This, this was after so many months of, of talking to our clients and the press and, and about bad news. It’s good to finally see a little bit of a light at the end of the tunnel. So always happy to be here and a pleasure talking to you. And I hope you stay safe and healthy.

Host:

You as well, stay safe, stay healthy. And again, thank you. That’s Richard Branch, he’s the Chief Economist for Dodge Data and Analytics – www.construction.com is where to find him. And this has been Engineering Influence from ACEC.