The ACEC Research Institute recently released two reports—the 2023 Economic Assessment of the Engineering & Design Services Industry and the Engineering Business Sentiment 2023 Q4—both of which point to continued optimism for the industry and its firms, albeit somewhat softened compared to previous quarters.
Now in its fourth annual release, the report focuses on the key economic drivers of the engineering and design services industry. As in its three previous iterations, it seeks to describe, measure, and analyze the economic significance of the industry, and to highlight its inextricable link to the overall health of the U.S. economy.
Overall, the report found that the engineering and design services industry has continued to build on its outsized post-COVID gains, growing nearly 11 percent in 2022—marking the second consecutive year of record-breaking growth. Although inflation eroded some of these gains, real growth was still relatively strong at 7.5 percent. Contributing to these gains were continued post-COVID stimulus spending, namely as a result of the passage of the Infrastructure Investment and Jobs Act (IIJA) and its associated investment in infrastructure.
Other key end markets fueled the recovery as well, with manufacturing, data center, residential, and commercial construction all outperforming. In terms of geography, the Sun Belt continues to see outperformance, with key markets like Texas, North Carolina, and Georgia leading the pack.
Firms continue to contend with workforce shortages, with total industry employment not pacing the growth in real output, advancing only 4.7 percent over 2021 levels.
Economic output growth will slow in 2023, but it will remain well above historical averages, growing 7.9 percent to $446 billion. All told, the future looks bright for the A/E industry, even as revenues return to Earth after hitting stratospheric heights post-pandemic. Growth will moderate over the forecast horizon as the IIJA’s impact diminishes and headwinds like interest rates, more restrictive lending, and labor constraints lead to a more challenging environment for A/E firms. The growth in public A/E activity will help to offset weakness in both residential and nonresidential construction in 2024 and 2025, with IIJA-supported A/E spend expected to peak in 2024. Other private-sector end markets, including office, commercial, retail, and residential, will likely see declines. That said, the overall forecast shows continued performance well above historical norms even amid these predicted declines. (See chart below.)
“Our findings show that 72 percent of firms predict an increase in hiring at their firms over the next 12 months, even with output returning to pre-pandemic levels,” says ACEC Research Institute’s Senior Research Consultant Joe Bates. “The work is there. What remains uncertain is finding qualified workers to fill those roles.”
While workforce concerns are a recurring theme in the Engineering Business Sentiment 2023 Q4 study, those concerns are overtaken by anxiety about new tax policies affecting research and development (R&D) amortization. Fifty-eight percent of firms report conducting R&D in 2023, with 45 percent of firms reporting spending at least $1 million. Of those firms, 87 percent report that the change in the R&D tax amortization requirements will affect their firms negatively, forcing them to either delay or pause growth plans (29 percent), or to invest less in R&D altogether (29 percent). (See chart below.)
Still, overall sentiment remains extremely positive for firms and for the overall industry. For this report, member firm leaders from around the country and from firms of all sizes were asked to weigh in on the current state of the industry and its direction. The survey uses a Net Rating methodology, which is calculated by subtracting the negative ratings from the positive ones. Therefore, a positive Net Rating indicates that overall sentiment is optimistic, while a negative Net Rating indicates an overall pessimistic sentiment. The higher the number, the stronger the sentiment.
The Net Rating for the industry is +82; for firm finances, the Net Rating is +81. Both numbers are down slightly (two points each) from the previous quarter, with small firms driving that decline. Optimism about the U.S. economy overall (+28) decreased four points, but it is still well off its low of -15 seen in 2022 Q3.
Among market sectors, current sentiment remains very optimistic; however, two-thirds saw declines in 2023 Q4.
Looking ahead, the report found that future sentiment remains solid for firms’ overall finances (+40), while future sentiment for the industry is only slightly positive (+16). That blunted optimism can likely be attributed to deepening concerns about the overall U.S. economy, for which sentiment remained negative at -16. That represents a drop of 14 points compared to the previous quarter. Rising concerns over inflation (84 percent), political 40% uncertainty (77 percent), and increasing interest rates (72 percent) are driving negative sentiment. As these numbers reflect, firms are particularly concerned about inflation, with concerns once again returning to levels seen in the first two quarters of the year.
“Taken together, these two reports provide a full and detailed view of the state of our industry, with the Economic Assessment giving the broad strokes, and the Sentiment study providing the fine lines,” says ACEC Research Institute Chair Mike Carragher. “As the marketplace continues to change and evolve, it becomes more and more important for firms to see the big picture. These reports reveal an industry in robust health, but they also serve as a reminder that we are far from immune to external turmoil.”
Learn more about the ACEC Research Institute at ACECResearchInstitute.org.