The past few years have been positive for most U.S. architecture firms, and 2018 looks to be more of the same. The upside to the distressingly slow economic upturn in the U.S. is that there are very few signs of imbalance in any major sectors.

Our economy will likely grow somewhere between 2.0 percent and 2.5 percent this year and next, just about the average pace we’ve seen since this recovery began in mid-year 2009.

While few analysts feel that there is much of a risk of an economy-wide recession anytime soon, few see much likelihood of a significant acceleration in growth. The Federal Reserve Board is in the midst of an interest-rate tightening cycle, which will serve to limit economic growth. The national unemployment rate is very low, indicating that businesses will continue to have trouble recruiting new workers. The stock market has performed well so far this year, generally signifying healthy profits at U.S. companies. While true, a significant share of these profits are coming from foreign activity, so stock prices are not a simple reflection of the health of the domestic U.S. economy.

In fact, design and construction firms—just like most other U.S. businesses—that are looking for stronger growth opportunities will need to look internationally. The International Monetary Fund, the World Bank and the Organization for Economic Cooperation and Development all project that world economic growth will exceed the U.S. pace this year, and will continue to do so next year as well. In particular, emerging markets and developing economies such as China and India are expected to grow at twice the pace of the U.S. economy next year.

Factors Affecting the Design and Construction Outlook
Gains in construction spending in the U.S. in 2017 reflect the tepid growth in the broader economy. As a result, the AIA Consensus Construction Forecast Panel is predicting slower growth for the construction industry for 2018. Overall spending gains for nonresidential buildings in 2017 are estimated at under 4 percent, slightly above this rate for the commercial and institutional sectors but a continued weak outlook for industrial construction.

The modest expected construction growth is the result of a few emerging concerns within the industry. One is the overall increase in inflation in many building materials costs. After years of overcapacity and weak demand for many construction commodities, there has been a reversal of this trend. Over the past year, oil-related products (diesel fuel, asphalt) have been rising at a 20 percent pace; metals (steel, copper, aluminum) at a 10 percent pace; and other basic building commodities (cement, gypsum board, lumber and plywood) at a high single-digit pace. In response, architecture firms and their clients have resorted to a variety of measures, including scaling back the scope or size of projects, redesigning projects, or even putting projects on hold or dropping them entirely.

Labor is another ongoing problem affecting the industry. With the unemployment rate in the construction industry falling from around 20 percent in 2010 to much closer to the overall unemployment rate in our economy at present, there are limited options for attracting labor into the industry. A particular concern is that immigrant labor traditionally accounts for close to 30 percent of the construction labor force, with most being Hispanic, and the recent focus on limiting immigration could restrict the availability of this labor pool.

Design Firms Benefiting from an Upturn
A somewhat more optimistic view is coming from architecture firms. Average Architecture Billings Index (ABI) scores for the first half of 2017 exceeded averages for both 2015 and 2016. While this could be viewed as architecture firms merely working down their backlog from a few strong years, that doesn’t appear to be the case. Index scores for both new project inquiries and new design contracts were stronger on average in the first half of 2017 than in 2015 and 2016, and as a result firm backlogs have been growing, not shrinking. By sector, the strongest ABI numbers have been coming from institutional firms.

Offshore opportunities should continue to improve for U.S. architecture firms. In addition to generally stronger economic growth globally, recent trends in the value of the dollar make the price of U.S. services more affordable internationally. After moving up through most of last year, the value of the dollar as broadly compared to our trading partners peaked in late 2016, and has fallen more than 7 percent through 2017. The decline has been even greater for some popular markets for U.S. architecture firms such as China, Canada, and Mexico.

Kermit Baker is the chief economist for the American Institute of Architects in Washington, DC. He is also the project director of the Remodeling Futures Program at the Joint Center for Housing Studies at Harvard University.

Excerpted from DesignIntelligence Quarterly.