We are pleased to share with you, Mark Fratto's featured article in January 2014's Construction News Dallas/Fort Worth. Mark was asked: What is your forecast for the AEC industry in 2014?
Fratto Engineering, Inc. is excited about our performance in 2013. We finished the year exceeding our revenue projections and meeting profit expectations. We completed a near record number of projects and added eight new clients.
Our performance is the result of a conservative management philosophy developed to accommodate the economic headwinds of 2013. We feel that many of these issues will persist through 2014 and therefore plan to continue our conservative approach to ensure that we provide quality design services for our valued clients.
Many forecasts are optimistic for construction growth in 2014 which is promising for the Architectural and Engineering community. However, as part of our conservative approach we won't be taking this for granted and will continue to keep our finger on the pulse of the economy. Forecasts for Institutional Building construction are encouraging, predicting an increase from 2% to 6% in 2014 with Healthcare flat to 7%. We will be monitoring this closely as these forecasts can be revised downward; 2013 forecasts were cut by over 50% midway through the year.
Issues impacting design and construction that we are concerned about include GDP, growing government debt, consumer spending, residential housing market, Architectural Billings Index and the Affordable Care Act.
GDP growth overall continues to be of concern. However, it is encouraging to see that 3rd quarter GDP was revised up to 4.1% lifting the average up from 2.5% for the first two quarters. Perhaps lower forecasts for the 4th quarter will also be upwardly revised. If the economy remains sluggish, it will limit the growth of non-residential design and construction. According to the NFIB, owner optimism is in record low territory, having only been this low less than 10 times in 40 years. Record high numbers of owners feel that this is a bad time to expand and nearly 70% are not interested in borrowing money.
Consumer spending accounts for 70% of the general economy. It is reported that consumer spending only grew by 1.4% in the third quarter of 2013, the slowest since 2009. The majority of consumer spending (about 70%) is in the services industry which only grew by 1.2%. In addition, consumer confidence declined sharply in October and again in November.
The residential housing market is also a significant driver of the economy and it is unclear if the impending Dodd Frank regulations will have an overall positive or negative impact on this market. In Texas we have been fortunate that the housing market has been impacted less than the rest of the country. While housing prices have been on the rise, it will take a few more years for municipalities to realize an increase in tax revenue.
The Architectural Billing Index measures billing relative to the prior month. After a quarter of marginal increases in billing, the index is again turning negative with November logging an overall decrease with a larger decrease for the Institutional market.
As the Affordable Care Act unfolds it continues to create uncertainty for business owners and for the Healthcare market. This uncertainty is driving a volatile and limited construction market while providers develop and implement new business models.
We are very fortunate to be located in Texas. The Texas economy continues to grow at double the national average and the population is expanding. Couple that with low interest rates, a business friendly environment, etc. and we are excited about meeting the challenges of 2014 and expect results similar to last year.
Mark Fratto, P.E., LEED AP BD+C