Q4 2020 Economic Indicators

My last write-up ended, “To conclude our Q3 analysis, our backlog remains strong, and our clients remain optimistic. Many of our industrial clients are scheduling renovation work to meet current and future demand, and many of our healthcare clients are actively looking at their backfill-renovation needs for 2021. I still expect overall industry volume to remain lower in 2021 than it was pre-COVID, and as a result, pricing will remain more competitive for our clients.”

The Congressional Budget Office currently projects Real GDP growth of 3.7% for 2021. This is a strong growth rate and relies heavily upon the economic surge expected as the vaccines start to reach mass saturation.

FMI Corp’s “2021 Annual Engineering and Construction Industry Overview,” available via download from www.fminet.com. The report projects total engineering and construction spending for the US ending up 1% in 2020 compared to ending up 2% in 2019. Looking ahead to 2021, FMI forecasts a 6% decline in engineering and construction spending levels when compared to 2020. The economic growth will be consumer-driven (the reopening) and not construction-driven.

Interpreting the trends from our two lead indicators, we can reach a similar conclusion:
The Architect’s Billing Index took a turn downward from 46.3 to 42.6. Anything above 50 is growth in billings, and while the indicator has been below 50 since March 2020, this month’s drop reversed a 6-7 month positive trend. This indicator serves as a strong 9-12 month lead indicator for our industry, and if there is less work being billed, there will be less work to build – we expect fewer opportunities throughout 2021.
The Dodge Momentum Index indicator took a jump forward from 123.3 to 134.6. This is a sizable jump for the indexed calculation and should imply that we will see a growth in opportunities beginning 12 months from now – spring 2022.

In summary, we are experiencing exactly what is being described above. Our backlog is currently strong but slightly down from 2020 levels. We see opportunities, but not quite the numbers from early 2020 (pre-Covid temporary freeze). The number of bidders pursuing these opportunities seems to be more significant, and as a result, we see a tightening of margins. In general, our clients should continue to see an increase in price competitiveness during 2021.