2021 Economic Forecast

February 17, 2021
By Bernard Markstein, Ph.D.

It’s all here: the impact of the coronavirus, data-based predictions for the construction industry, and the best opportunities for your p-h-c business moving forward.

After more than 10 years, the longest U.S. expansion on record came to a screeching halt due to the novel coronavirus. A recession precipitated by the pandemic began in March of last year. Although not officially declared yet, most economists agree that June was the last month of a very short, deep recession. Even though economic growth resumed in July, economic activity has yet to return to its pre-pandemic level. Return to that level as measured by Gross Domestic Product (GDP) is unlikely to happen until at least the second half of this year or early next. At the same time, employment will be even slower to recover. The seasonally adjusted (SA) unemployment rate fell from its recession peak of 14.8% to 6.7% by the end of last year. However, that is still fairly high, well above its pre-pandemic level of 3.5%.

When will employment levels return to normal?

Part of the reduction in the unemployment rate is due only partially to more people finding employment, as many workers have dropped out of the labor force. This is a result of some workers having to stay home due to illness, or to care for a sick household member, or to care for children who either no longer have daycare available to them or are remote learning. Others have dropped out the workforce as they believe there are no jobs available. Many of these people choose to attend school or a training program in order to upgrade their skills and credentials to make themselves more marketable.

Recovery for both the economy and employment depends on the speed of distribution of the coronavirus vaccines and on the percentage of the population willing to be vaccinated. It will be at least late summer or fall before a sufficient number of people are vaccinated and the economy can return to some semblance of pre-pandemic normal. Nonetheless, many of the negative effects of the pandemic on the economy will linger. Consequently, employment levels will not return to their pre-pandemic levels until late next year at the earliest and more likely not until 2024.

The $900+ billion 2020 COVID-19 relief package signed into law at the end of the year will offer some support to the economy. The Biden administration’s proposal for an additional $1.9 trillion coronavirus relief package would provide additional economic stimulus. Although the package will not pass in its proposed form, the final size of the package will strongly influence the speed of growth this year and next. The larger the final package, the better for overall growth and for repairing the damage from the pandemic to the economy.

Construction on the Rebound

Like most of the economy, construction, and therefore construction employment, was battered by the spread of COVID-19 and measures to limit its spread. However, construction performed better than many other occupational groups and has been relatively quick to rebound, though not back to its pre-COVID-19 levels. Construction employment fell 14.6% from its February peak to its April low, but rebounded strongly, up 13.2% from that low by year end. That left it 3.3% below its peak, down 253,000 jobs.

Plumbing and HVAC contractor employment, however, performed better overall. From its February peak, it dropped a bit less to its April low, down 13.2%. As of December, employment was up 12.8% from April, leaving it 2.2% below its peak, down 25,200 jobs.

The outlook for construction is fairly positive, although there will be lingering effects from the pandemic this year and next. Residential construction performed the best in 2020 and was a major factor in lifting overall construction spending last year. Housing demand was driven by historically low interest rates and a desire for more and safer space. Residential construction activity will remain a positive both this year and next. Overall, there will be numerous opportunities for plumbing contractors.

Residential Construction

The sharp rise in remote work and remote learning were key forces driving the desire for more and better residential spaces. Remote work has allowed households to move further from center city locations to suburban locations or even to other, smaller cities. Housing costs are often lower in these locations than where people moved from.

For some homeowners, this meant moving to a larger house in the suburbs or to a smaller city. For renters who did not want to buy or could not afford to do so, they could move to a rental unit that was larger either in the downtown area, or in the suburbs, or in a different city, often at the same or lower rental rates. These same factors also led to an increase in people making improvements to their homes both through DIY projects and using contractors for larger projects.

Since the bursting of the housing bubble until toward the end of last year, the number of single-family houses built has fallen far short of the long-term needs of the population. As a result, there is plenty of room for increased new home construction without creating another housing bubble. Tight rein by lenders for new residential construction financing keeps housing construction from spinning out of control again.

Low interest rates and the need/desire for more space will support housing demand for the next few years. Single-family construction spending will increase by double digits this year and grow at a slower, but still healthy, rate next year. Spending on improvements will continue to grow at a solid rate this year but will grow at a slower pace next year. Spending in both of these arenas will benefit plumbing contractors.

Construction of multifamily units is settling down to a steady state, with multifamily starts averaging around 340,000 starts per year. Fewer of these projects will be in the downtown areas of major cities. More of them will be in the suburbs and in secondary and tertiary cities. These tend to be smaller projects in lower cost areas, keeping spending growth down.

Among the needs for both existing and new multifamily buildings will be HVAC systems that provide significant outside air exchange that filters out pollutants and pathogens. These systems need to be easy to monitor to maintain peak performance and have filters that are easy to clean or replace. Another requirement is touchless technology for plumbing fixtures in shared bathrooms and other common areas.

Office Construction

The traditional office is far from dead. Many companies will continue to incorporate some remote work but also maintain a central office. The most likely model will be a hybrid, allowing for a mix of in-office and remote work. With proper cleaning, it will be possible to share office space, further reducing the footprint for individual workers in the office – a trend that was occurring before the pandemic. At the same time, the need for social distancing both in work and common areas will mean the need for more space.

As with multifamily buildings, office buildings will require HVAC systems with high-quality ventilation that incorporates considerable outside air exchange and captures pollutants and pathogens. These systems need to be easy to care for with low-cost maintenance. Plumbing fixtures with touchless technology is another necessity. These items need to be included in both new office construction and in renovations. As relatively few new projects will be started over the next two years, most of the work will be for renovation of existing space.

Most companies will reduce their footprint in larger cities. Many will use satellite offices and allow for a continuation of remote work for at least part of the work week/month.

Retail Construction

Retail establishments will continue to consolidate, as the pandemic and pandemic restrictions accelerated the trend away from brick-and-mortar stores to online purchases. Returning to eating in restaurants will rise, albeit slowly. This year and next year, restaurants and bars will provide most of the opportunities for plumbing contractors as these establishments continue to renovate their facilities to accommodate concerns about disease transmission and to meet local health standards. Quality HVAC systems that provide clean ventilation are essential. Once more, touchless plumbing fixtures in bathrooms will be de rigueur.

A small number of malls will be converted to residential properties, which will provide opportunities for plumbing contractors. These will be multi-year projects.

Lodging Construction

As both business and pleasure travel plunged, lodging occupancy rates nosedived. There was little desire or financing for new construction. Most spending was aimed at reducing the possibility of disease transmission in rooms and common areas to protect employees and customers.

Going forward, this means upgrading HVAC systems to improve air flow and reduce the likelihood of spreading disease. Again, plumbing fixtures in shared bathrooms need to include touchless technology. These features are required in new properties and in property renovations.

Education Construction

School administrators in both the public and private sectors were faced with protecting their staff and students from the transmission of COVID-19. This led to implementing remote learning in much of the country. Meeting the requirements arising from remote learning cost money that had to come out of school budgets even as revenues declined, further constraining budgets.

The funds to renovate educational facilities to protect students and staff generally came out of the capital budget. Further, cutbacks in funding often meant targeting the capital budget as the easiest place to reduce spending. Thus, despite spending on refurbishing existing space, educational construction spending fell last year.

As renovations of existing space continue, plumbing contractors will be called on to improve HVAC system air flow and filtering, as well as touchless plumbing fixtures. These elements will also need to be included in new construction.

Healthcare Construction

COVID-19 further raised the already high priority of infection control for healthcare facilities. The requirements for safely treating the coronavirus and the vicissitudes of patient loads have placed a focus on the advantage of adaptable space that can easily and rapidly be reconfigured.

Ventilation is key, with filters that capture extremely high percentages of pathogens and can be easily monitored and cleaned or replaced to keep these systems at peak performance. Designing flexible spaces so that ICUs can be expanded and contracted is another high priority. This includes the ability to create negative air pressure in these units. Touchless plumbing fixtures are also essential. These features are most easily included in new facilities, but there is a great need to incorporate them in existing facilities.

President and Chief Economist
Bernard M. Markstein is president and chief economist, Markstein Advisors, an economic consulting company providing analysis and forecasts of the national economy and construction activity. Dr. Markstein’s experience includes analysis and research in residential and nonresidential construction, housing, real estate, financial markets, macroeconomic issues and regional markets.

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