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Music.

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Welcome to Engineering Influence, a podcast from the American Council of Engineering Companies.

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And today we are continuing with our latest research from the ACEC Research Institute.

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Not too long ago, we took a look at Q4 of the Engineering Business Sentiment Survey with Joe Bates.

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And today we are joined by John Gray, Principal at Rockport Analytics,

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to talk about the macroeconomic look at the impact of the engineering industry at large.

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And that's the economic assessment of the engineering industry and the five-year

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forecast to go along with that newly published for 2024.

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John, welcome to the program. Thanks, Jeff. Great to be with you here this morning. You know,

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I really appreciate the work you put into this.

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This is how many years now has the, have you done the forecast for the Institute?

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Yeah, this is actually the fifth year. So the fifth year anniversary of the research.

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So a lot of interesting stuff. And we've got some really, really cool trends

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that we've been able to dig up over those five years.

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And that's really, I think, the differentiator now.

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And I was talking to Joe about the sentiment survey and the same idea is that after a while,

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doing enough of these surveys, you start to actually be able to get some trend

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data that can now create leading economic indicators or additional more in-depth

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numbers for a lot of analysts inside the industry and outside the industry to

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take a look at how, you know, engineering and design services are impacting the macro economy.

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Yeah, exactly. You know, as an economist, you know, data is our friend and having the, those.

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You know, long-term trends that we can build into the models,

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you know, because part of the research that we're going to be talking about

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this morning is, is forward looking, right.

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We're developing a forecast of where we think the industry is going.

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And so the more data we have, historical data, you know,

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the better the models are that, that allow us to build those forecasts

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so let's delve into the the report so what you know what has changed year to

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year now looking at the general macroeconomic impact of the engineering design

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services industry on the u.s economy how are we looking in terms of gdp in terms

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of employment those top line indicators.

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Yeah, Jesto, you know, the last year, full year of data that we have,

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it's obviously 2023 in terms of a calendar year.

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We're not through 2024 yet. And a lot of the data that we collect is reported

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by government agencies. And there is a bit of a lag sometimes with those statistics.

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And so we're really looking backwards and looking at engaging performance for 2023.

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You know, what we've seen is that the industry continues to grow.

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You know, we see really a lot of

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strength in the industry, in particular different parts of the industry.

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I think we'll talk about some of those component parts where we see strength

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specifically here in a few minutes. But growth is moderating a little bit, right? Coming out of the pandemic,

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we saw really strong double-digit growth in terms of revenues in 2021 and 2022 across the industry.

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That is moderating. We're down more in like the 6% range is what we're seeing.

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We think those numbers might be revised upward a little bit by the time we get final statistics.

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But growth is moderating. And so as revenue growth moderates,

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we see some of the other economic KPIs that we tend to follow sort of track alongside of revenue.

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So if we look at jobs supported in the industry, those were up about 3.4% last

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year. So 1.6 million jobs supported by the industry.

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When we look at average wages, we continue to see wage growth, right?

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And we can talk about some of the specifics about what's driving that,

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but wages up another 5% to about $109,000.

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So by and large, just a lot of strength in the industry and a lot of strength

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across the different KPIs that we're tracking. Now, 2023, that was a time of

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some really aggressive Fed activity when it came to interest rates.

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How have the interest rate hiked by the Fed back in 23 and then also the inflationary

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pressures we've seen across the economy affected some of those numbers?

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Yeah, I mean, no doubt it's been a headwind, right?

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And so we've talked about inflation for a couple of years now and obviously

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been tracking closely the impact that inflation's having on both the macro environment

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and the engineering and design services industry. And.

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You know, it is obviously a very interest rate sensitive industry, certain parts of it.

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Obviously, when you think about construction and the cost of investment,

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whether that's residential or non-residential investment, interest rates play a pretty big role.

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And so, you know, when I talk about that moderating growth, that is really one

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of the biggest factors that we have in terms of headwinds.

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And so I think when we think about the fact that interest rates have risen as quickly as they have.

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And we've had to deal with these inflation rates that we have over the last couple of years.

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The industry has been really resilient, right? So despite the fact that we've

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seen these sharp rises in interest rates, we're still seeing 6% plus growth in revenue in 2023.

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And the good news is we are at a tipping point.

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We're at a point now where inflation is coming back in line.

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We are, if not all the way down to the Federal Reserve's target level of inflation.

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We are getting close enough that we're starting to see rate cuts.

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And so we're starting to see rates come back down.

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We don't think they're going to be down to where they were a couple of years

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ago, but certainly something that's giving, instead of a headwind,

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as we look forward a little bit more of a tailwind for industry performance. Absolutely.

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Of course, we're still seeing it now because the money is still not completely spent.

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But of course, we are in the day of the IIJA and the CHIPS Act and CHIPS and

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Science Act and the Inflation Reduction Act, a lot of money going into the marketplace.

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What's the impact in your view of that federal spending for infrastructure and

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activities where our industry can be engaged?

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Yeah, well, you know, it's huge, Jeff, because obviously a lot of that money

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finds its way ultimately into the engineering and design services industry.

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You know, we're talking about $1.2 trillion rolled out over a number of years.

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As of the White House's latest announcement, roughly half of that funding has been assigned.

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Now, that doesn't mean that funding has actually found its way to these companies

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or into these projects yet. So we have at least half of that funding still to come.

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And so we think over the next four to five years, it's going to continue to

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be a boon to the industry. And in particular, of course, the end markets that are tied directly to infrastructure.

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So if we think about water, wastewater, transportation, roads,

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bridges, et cetera, those parts of the sector are certainly going to benefit

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over the next couple of years. In terms of geographic growth, what are the states that we've seen growth in the industry?

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I noticed that there are a couple of states that seem to have to change pole

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position, North Carolina, Ohio, Florida, and some others.

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Where are you seeing real growth or change in geography here with the industry?

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Yeah, so, you know, the good news is all regions or all states around the country

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are continuing to see growth in terms of engineering and design services activity.

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It's relatively strong across the U.S., but as you noted, there are certain

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regions or states that are outperforming.

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A lot of those are the states that we've seen outperform over the last couple of years, frankly.

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When we look at the different census divisions, so there's nine different census

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divisions in the U.S., we see the strongest growth coming from the South Atlantic

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as well as the mountain states.

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And, you know, those trends are sort of following the population trends or the

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migration trends that we see across the U.S.

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And so over the last number of years, and this has really been accelerated by

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what's happened through the pandemic.

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You know, we have a lot more flexibility these days in terms of where we can

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live and locate a lot of people working remotely or having some sort of hybrid work relationship.

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And we've seen that sort of accelerate this trend towards more affordable markets,

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again, looking at like the Southeast and even some of the mountain states,

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as well as those markets that are tied to quality of life.

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You know, people sort of chase warmer weather or outdoor activities,

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whatever those they're interested in, they have the ability now more so than ever to go there.

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And so obviously the built environment tends to follow population, right?

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Whether we're talking about residential or building office space,

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you know, apartment buildings, building retail establishments.

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And so we think that that trend is going to continue where people continue to migrate.

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Obviously, it can't go on forever, because at some point, you know,

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you lose the advantages when you have demand going into these regions,

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costs go up. And so naturally, from an economics standpoint,

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there tends to be a tipping point there. But we expect that to continue over the next couple of years,

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sort of the trends that we're seeing, in particular, again, the mountain states and the South Atlantic.

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Now, let's talk about market sectors, I guess, within the engineering design services industry.

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What were the market sectors that kind of were the ones that seemed to be the

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winners and which are the ones that seem to be cooling off? Yeah.

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And so great question. It's something that we look at every year when we really

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drill down into the data, because obviously it helps member firms really understand

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where the opportunities are, you know, as we look forward.

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Obviously, you know, with the interest rate environment, we've seen a slowdown

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in residential, in particular single-family residential over the last year.

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But we do think that the market dynamics and the, you know, pent-up demand for

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single-family residential is going to drive that moving forward.

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So as interest rates normalize, we think that part of the market is going to do really well.

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Multifamily, we do see a little bit of oversupply in the marketplace.

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So we think that there might be some headwinds there over the next few years.

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In terms of the real high growth areas of the market, you know, I talked about IIJA.

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I think those are the end markets or sectors that we're really focused on.

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And so transportation, streets and highways, power. We also see strong growth

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in education facilities and construction.

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In terms of a weakness, relatively speaking, we expect a little bit more weakness

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in those sectors that tend to be tied more tightly to the macro environment.

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We are seeing, you know, I talked about this resilience that we're seeing.

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We are seeing interest rates start to normalize, but we are seeing growth slow a little bit.

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And as the macro economy starts to slow, those cyclical sectors are going to slow alongside of that.

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And so when we think about like commercial real estate,

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When we think about, you know, office space, obviously the supply and office

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space and some of the dynamics we're seeing in the market there leads us to

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believe that will grow a little slower.

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Lodging, amusement and recreation, those more cyclical parts of the industry

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are going to perform relatively worse over the next few years.

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Yeah. And, you know, want to also bring up the issue of workforce and skills

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gap, because this is something where we're very engaged in. it's really the

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hot topic amongst the industry. You talk to any CEO right now, and the sentiment is there that they're turning down work.

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Interestingly enough, in the Q4 sentiment report, it was turning down profitable

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work because they don't have the workforce to actually do the job.

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How has that impacted the industry from a national level in your research?

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Yeah, absolutely. It's definitely a hot button issue.

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As you said, it's hard to have a conversation with somebody in leadership within

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the industry and that not come up as one of their key pain points. Right.

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And so, you know, we continue to see when we look at the data,

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the number of job openings running significantly higher than the number of actual hires.

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Right. So, you know, clearly there is a lot of tightness in the labor market.

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There's a lot of competition for labor that's also driving up wages and making

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it even more challenging because it's not just bringing on people,

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but bringing on people where you can still operate profitably.

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And work in this tightened environment.

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So it is a real challenge. It certainly shows up nationally in the data.

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Unfortunately, a lot of what we see in terms of looking at the demographics

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leads us to believe that, you know, it's not a problem that's going away overnight, Jeff, right?

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Like it's, you know, we've seen the continued tightness in the labor market.

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And when we look at, for example, the age of workers within engineering and design services firms,

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we can see that it's about 27% of workers in the industry are 55 or older, right?

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And so, in other words, nearing retirement age, right?

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And so these are going to be workers that are leaving the workforce.

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So it's really a longer term challenge, I think, that we as an industry or firms

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within the industry need to address in terms of,

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you know, how do we get younger workers into the workforce?

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You know, how do we deal with how do we get more productivity out of the workers that we have?

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You know, it's something that that is not going away, you know,

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tomorrow or the next week or the next month.

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And it's a longer term problem that I think we're all going to have to address

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moving forward. And it's a challenge that's going to be with us for a while.

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Yeah. And for those listening from the public policy arena, I mean,

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I know the focus right now is on government efficiency, but that aging out of

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the workforce isn't just on the consultant side. It's also on the client side, on DOT side.

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And DOTs across the country are having problems filling roles because of the, really, the.

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Impacts of COVID, but then also they have a retiring workforce and they're scrambling for people as well.

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So that has the double threat of persisting this problem and also slowing down

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project delivery, which is something that we don't want to have happen.

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So something from on a public policy side to keep watch on.

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John, we covered a lot of ground here. I mean, outside of looking at specific

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things, is there anything that we didn't bring up that you want to make sure

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our audience understands about where things are going with the industry?

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Yeah, no, like you said, I think we covered kind of the key issues.

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I think I would just sort of wrap here by saying that, again,

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the industry is performing very well. There's a lot of opportunities.

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We talked about some of the challenges. We are seeing growth slow, I should say moderate really, but we think growth

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is going to remain above long-term trend.

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I mean, everything tells us that the industry is on really solid footing right now.

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IIJA is obviously a big part of that.

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The fact that from a macroeconomic standpoint, inflation is coming back in line.

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We are seeing interest rates start to normalize again.

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We've avoided this longest predicted recession in history, right,

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for the last couple of years. Yes. That's all economists have been talking about is this recession that's on the

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horizon that just hasn't come, thankfully.

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And so, you know, and we don't think it's, you know, reading the tea leaves

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now, we don't think it's coming, you know, over the next couple of quarters.

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Obviously, there can always be some sort of external factors that we're not

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anticipating that can cause, you know, challenges, a geopolitical event or something.

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But, you know, that's not what we see on the horizon. and things look bright.

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Obviously, there's a lot of uncertainty still with the incoming Trump administration

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and what policy is going to look like.

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I think, you know, we're going to have to wait and see on trade policy and tax

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policy and how those things shape up.

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So certainly areas to keep an eye on moving forward.

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But by and large, you know, things look really good from an industry standpoint,

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you know, despite some of the challenges that naturally, you know,

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we're always going through and having to face as an industry.

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Yeah. From an advocacy perspective, that's our focus now.

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It's going to be tax trade policy and workforce. Those are the big items that

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are kind of screaming out for attention.

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And I'm sure there'll be others as the new administration changes and takes

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over in January. But, John, really do appreciate the work you and your team

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does at Rockport for producing this study.

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Really appreciate the time that it goes into really getting the numbers out there.

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I really encourage anyone out there to go to the ACEC Research Institute's website

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at acecresearchinstitute.org to download the report. It's right there on the homepage.

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Take it, use it, share it with your colleagues, and come back for our 2025.

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At the end of the year. So, John, thank you very much for joining us,

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and I appreciate it very much. Thank you, Jeff. Thanks for having me.

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And again, this has been Engineering Influence, a podcast from the American

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Council of Engineering Companies, and we'll see you next time.

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Music.