2023 ECONOMIC OUTLOOK

2023 ECONOMIC OUTLOOK

A look ahead at the coming year with Georgia economist Dr. Roger Tutterow

TThree years ago, as news of the first COVID-19 case in the United States spread, people began living their lives in two-week intervals. First, the news was that sheltering in place for two weeks would flatten the curve. Then, millions of people spent two weeks waiting in isolation after each potential COVID exposure. And public health officials in the early days argued that another two weeks would bring a greater understanding of how the pandemic was spreading. For months, it seemed that in a couple of weeks, we would know more about what to expect, whether the economy would shut down, and how the pandemic would affect each individual.

Certainty never came. In many ways, the story of the COVID-19 pandemic and its aftermath is the story of learning to live with uncertainty. For engineers, the pandemic brought dire predictions of a recession, of unprecedented unemployment, of construction shutdowns, of real estate collapse.

Instead, all that happened was a contraction so short that many engineering sectors never even felt it. In fact, for most sectors, 2020 and 2021 brought unprecedented growth and a bonanza of mergers and acquisitions.

Engineering and construction started strong in 2022, following an 8% growth in construction spending in 2021. Gross output was $2 trillion in the second quarter of 2022, up slightly from $1.9 trillion the previous year. It’s left many engineers wondering if the dire predictions about a recession in 2023 are just more talk.

Roger Tutterow, Chief Economic Advisor for Henssler Financial, the Henssler Financial Endowed Chair at Kennesaw State University, and the Director of the Econometric Center, an applied research center at Kennesaw State’s Coles College of Business, says engineers need to take the predictions seriously.

A RECESSION: “THE MOST LIKELY OUTCOME”

“By the end of the year, it became clear that a recession to 2023 is the most likely outcome. Some of that, of course, is due to the federal reserve’s shift in monetary policy. But part of the adjustment is also that we had a real surge of activity in late 2020 and early 2021 associated with the reopening of the economy and the ramping back up of production,” Tutterow said. N

In late 2022, the Architectural Billings Index began showing slight declines in 9-12 month nonresidential construction activity. Figures below 50 indicate declining growth, while those above 50 suggest slowed billing. In November 2022, the figure for billing was 46.6, and for design contracts, it was 46.9. The respective figures in November 2021 were 51 and 55.8.

“It may well be that we overshot in some portions of the economy,” said Tutterow. “The Conference Board’s Index of Leading Indicators has been dropping now for about seven months.”

The World Bank projects growth in advanced economies will slow from 2.5% in 2022 to just 0.5% in 2023. For two decades, slowdowns of this level have reliably predicted recessions. In the United States, growth will mirror these projections, but in emerging markets, the deceleration will be slower - 3.8% in 2022 to 2.7% in 2023.

But this recession is unlikely to spur the kind of dramatic contraction of 2007-2009’s Great Recession, which lasted 18 months. Since World War II, the average length of a recession has been about ten months, according to the National Bureau of Economic Research.

“Not all recessions look like 2009, which was very deep and very protracted,” said Tutterow. “It is possible to have a mild to moderate recession without it being catastrophic.”

FIVE FACTORS INFLUENCING THE ENGINEERING ECONOMY IN 2023

No matter when the recession comes or how hard it hits, the shifts of recent years have fundamentally changed the market for engineering and the wider economy. In its 2023 Engineering and Construction Industry Outlook, Deloitte predicts the following five factors will be key influences in the coming year:

DIFFERENT EFFECTS ON INDUSTRY SEGMENTS

While the recession may have some effect on all segments of the industry, the impact could be disparate.

Many engineering firms are working through significant backlogs. Into the second half of 2023, they may see a slowdown as they move through their backlogs. Rising interest rates have caused residential construction to decline. The pandemic’s shift toward working from home continues to slow construction of new office buildings, too.

Labor costs and supply chain shortages are continuing to decrease margins.

Companies working on infrastructure projects, however, may remain strong. October of 2022 brought a $1 trillion influx in funding from the Infrastructure Investment and Jobs Act. Beneficiaries of these funds may be able to use them to attract new labor in a tight market.

SUPPLY CHAIN PRESSURES

Companies continue to report supply chain-related delays. Sixty percent of U.S. consumers told Gallup in late 2021 that supply chain disruptions prevented them from getting a product they wanted.

These pressures are creating transport bottlenecks and long delays. They’re also driving up the cost of materials. Construction input prices increased by 40.5% between February 2020 and August 2022 due to both inflation and supply chain issues.

During the height of the COVID pandemic, businesses that could quickly shift to digital models or offer needed services thrived. Those with less flexibility floundered. The same will likely be true as the industry continues to navigate supply chain shortages.

More visibility into and control over the supply chain is key. Many engineering and construction firms may move their supply chains closer to home. These shifts may require initial investments and innovation, but with the possibility of a significant long-term payoff.

ONGOING LABOR CHALLENGES

Engineering and construction face significant shortages of skilled workers thanks to a confluence of factors. Construction workers ages 25 to 54 decreased by 8% over the last decade, but the number of retirees increased. Younger workers are now choosing adjacent industries, such as technology, increasing the rate at which the engineering talent pipeline leaks.

Workers know the market is tight and demand higher pay and better benefits, leaving firms who can’t or won’t pay more in the lurch. In Deloitte’s survey, more than 80% of respondents reported that a tight labor market was one of their top challenges in the coming year.

Recruiting talent isn’t enough, either. Firms are now finding that workers want better working conditions, more flexibility, and remote options. Businesses that can’t or won’t adapt will be left to compete over less skilled workers who couldn’t get better jobs.

Tutterow argues that the long-term effects of the COVID19 pandemic might be strongest in the labor market. A decade from now, the main aftereffects of the crisis may be in changing expectations about where and how people work.

Deloitte says attracting new kinds of workers to engineering could help address the long-term labor market challenges. In 2021, just 11% of all construction workers were women; 6.3% were Black, and 2.1% were Asian. A focus on diversity, equity, and inclusion could expand access to a larger pool of skilled labor, foster better working environments, and spur innovation, Deloitte’s research finds. N

As the public continues to demand more equitable workplaces and fairer corporate policies, Diversity, Equity, and Inclusion initiatives can improve a firm’s public image (with clients and potential recruits) and offer a practical solution to a growing workforce challenge.

EFFICIENCYDRIVING TECHNOLOGIES

Engineering and construction has historically been slow to adopt new digital technologies. But the pandemic made a strong case for greater flexibility. Many firms are now expanding their capacity with new digital technologies that reduce costs and improve efficiency.

Deloitte’s data suggests that 44% of survey respondents are interested in investing in new technologies. Those who do may be better equipped to weather labor shortages, supply chain disruptions, high material prices, inflation, and other economic storms.

As interest in artificial intelligence and machine learning rises to a fever pitch, some firms may look to emerging technology to resolve labor shortages. Those that can adapt stand to thrive even as labor and supply challenges continue to pummel the industry.

ESG AND SUSTAINABILITY DEMANDS

Environmental and social governance (ESG) and sustainability are not just buzzwords. They are critical to the future of engineering and the world. They’re also good business.

In a June 2022 survey by Associated General Contractors of America, 78% of respondents had recycling policies, 48% had materials reuse policies, and 26% had environmentally friendly or sustainable purchasing policies. But just 14% report their greenhouse gas emissions on at least one project, even though this is a core sustainability concern among consumers.

According to Deloitte data, the most popular ESG and sustainability goals include:

• Promoting sustainable design, development, and construction practices: 83%

• Reducing energy consumption: 63%

• Reducing waste and encouraging responsible waste disposal: 60%

• Sourcing lower carbon energy: 17%

As climate change becomes a global focus, it could create intense economic pressure for companies to prioritize reducing their carbon footprint.

THE UNIQUE ECONOMIC CLIMATE OF GEORGIA

“Georgia is in better shape economically than many of its peers around the nation,” said Tutterow.

Some economic pressure is true no matter where you’re doing business or in what sector. The influence of inflation and the Federal Reserve’s shift in monetary policy is difficult to overstate. Between June 2021 and June 2022, inflation rose by 9%. Money costs more to borrow now than it did a year ago, and it buys less.

Georgia, though, may be uniquely positioned to thrive through the recession.

“Markets vary geographically. And Georgia held up better during the pandemic than your typical state. It’s had pretty strong growth since the pandemic started waning. As of today, it’s among the top six states in terms of where its employment is today versus before the pandemic.”

In his Georgia Economic Outlook speech in December 2022 at the Georgia Aquarium, University of Georgia Terry College of Business Dean Ben Ayers agreed that Georgia may do better than most other states as the economy slows.

“Our forecast calls for Georgia’s inflation-adjusted GDP to decline, but only by 0.2%. So, it will be essentially flat. That is a small decline compared to prior recessions and to what we expect from the nation as a whole, which is a 0.7% decline,” Ayers said.

During the Great Recession, by comparison, gross domestic product (GDP) fell 4.3 percent from its peak at the end of 2007 to its trough in 2009, the largest decline since World War II. The unemployment rate, which was 5 percent in December 2007, rose to 9.5 percent in June 2009, and peaked at 10 percent in October 2009.

In contrast, Ayers predicted a 0.1% increase in job growth in Georgia in 2023.

A short-term contraction in building and construction could also mean growth in 2024. Ayers predicts a home shortage in 2024 and suggests that construction may play an important role in pulling the state out of its recession.

Tutterow says that fast-growing communities tend to spur more engineering and construction projects.

Georgia is the 11th fastest-growing state in the nation. And Atlanta’s population is swelling. An analysis from Woods & Poole Economics, Inc. projects 53.4% growth in the metro Atlanta area’s population between 2020 and 2060.

WEATHERING THE STORM AND LOOKING AHEAD

The World Bank expects that global inflation will moderate by the end of the year. But even at the end of 2024, GDP levels may remain suppressed, especially in emerging and developing economies.

Tutterow expects that engineering and construction firms will be less risk tolerant, seeking opportunities to reduce costs as the recession approaches.

There’s also ongoing uncertainty about non-residential construction and engineering.

“Over the longer term I still don’t think we have clarity about how the pandemic affects the office market or the retail sector over the long-run,” Tutterow said. “There are many workers who are not wanting to come back to five-day-a-week face-to-face offices. This will have real implications for new office construction, and also how the projects are designed.”

While each segment of the industry faces different pressures, some strategies may help protect against the worst effects of the recession:

• Pay attention to shifting workplace norms. The best employees have more opportunities and thus more negotiating power. Firms that can meet these demands will experience fewer labor shortages.

• Develop a talent retention strategy that is mindful of a tightening labor market. Recruiting new talent is often more expensive than keeping the talent you have.

• Generate new efficiencies to save costs and create a financial buffer. Where possible, implement new technologies that reduce costs and expand your reach.

• Capitalize on funds from the Inflation Reduction Act and Infrastructure Investment and Jobs Act.

• Assess how investments now, especially in sustainability and new technologies, may offer greater flexibility and more cost savings in the future.

For many engineering firms, opportunities for growth continue to abound even if the wider economy struggles.

“There will be a lot of non-building construction projects, whether it’s related to energy and water infrastructure or transportation infrastructure, that will continue to support the engineering sector due to federal stimulus spending,” added Tutterow

Engineering is, at its core, about solving problems. The industry is uniquely positioned to solve the challenges 2023 presents and to support an economy that bounces back stronger than ever. The coming year will inevitably present some hurdles, but the opportunities are real and numerous.