March/April 2021 | Vol. 26 No. 2

by Fred Ashton, Economist, NEMA

Nonresidential fixed investment in structures, a key end market for lighting products, was already under strain before the onset of the COVID-19 pandemic. In the final quarter of 2019 and the first quarter of 2020, real private investment in structures declined 5.3 and 3.7 percent at an annualized rate, respectively.

The response to the pandemic accelerated the downturn in the second quarter with a drop of nearly 36 percent followed by a decline of more than 17 percent in the third quarter. With a share of existing office, school, and commercial infrastructures remaining unoccupied because of pandemic-related precautions, the near-term willingness to invest in new structures is likely to remain anemic.

Weakness in the sector has been broad-based, with service-oriented sectors—the most vulnerable to COVID-19 restrictions on businesses— experiencing the steepest declines in construction spending. Both lodging and amusement and recreation fixed investment in November 2020 were down more than 26 percent from November 2019. Spending on educational facility construction projects declined 17.6 percent over the same period, while manufacturing projects slumped 15.1 percent. Transportation, office, and healthcare projects experienced year-on-year percent declines in the mid-single digits. Experts anticipate private nonresidential construction will slow further in 2021 before a long slog of slow, single-digit annual growth commences in 2022.

On a more positive note, recent residential construction strength has partially offset the nonresidential construction downturn. Supported by record-low interest rates and a preference for the suburbs during the pandemic, the number of housing starts has nearly recovered to the pre- pandemic level. Data from November 2020 showed total housing starts increased 1.2 percent for the month to 1.547 million units, just 70,000 units shy of the recent peak in January 2020. Permits, an indicator of future construction, surpassed the pre-pandemic January level, reaching 1.639 million units, the highest level since 2006.

Data on residential investment spending also confirm the strength in housing. After falling nearly 36 percent at an annualized rate in the second quarter, the third-quarter gross domestic product report showed private residential investment rebounded 63 percent, to the highest level since the third quarter of 2007. Home construction should expand through 2021.

The outlook for these key end markets suggests weakened demand for lighting systems and products in the near term. However, prospects should improve by 2022 as the economy emerges from the impact of pandemic-related lockdowns adversely affecting a swath of service sectors. ei