NearTerm Construction Prospects Dimming

June 20, 2002
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NEW YORK — The short-term impact of the Sept. 11 terrorist attacks will be negative for both the economy and the construction industry.

But the McGraw-Hill Construction Information Group says the stage is set for renewed expansion in 2002 and 2003.

In his monthly report released eight days after the attacks, Robert Murray, vice president and chief economist for McGraw-Hill, said the uncertainty in the wake of the attacks will likely dampen consumer confidence for a while.

Although continued strength in consumer spending in the first half of the year offset some of the decline in business investment over that period, that offset is no longer present, he said.

It’s estimated that the economy contracted 0.5 percent in the third quarter and additional decline is expected in the fourth quarter.

The bottom for the current economic slowdown has been pushed back a quarter or two, but several factors pave the way for renewed expansion next year, including the Federal Reserve’s most recent cut in the federal funds rate.

The Fed lowered the short-term interest rate by another 50 basis points to 2.5 percent on Oct. 2, the lowest the rate has been since 1962.

Further stimulus has been provided by Congress’s passage of a $40 billion emergency spending package and the federal government’s $15 billion bailout of the airlines and proposed tax breaks to businesses and individuals.

All those moves will help strengthen the economy over the next year, Murray observed.

He said the construction industry had been performing “reasonably well” through August of this year despite the weakened economy.

The value of construction starts reported by F.W. Dodge advanced 2 percent during the first eight months of the year, compared to annual gains of 5 percent in 2000 and 10 percent in 1999.  Though the rate of growth slowed, the overall level of activity remained healthy, he noted. 

Weakening employment and credit tightening have led to declines for commercial building, but other project types have taken off.

Further expansion has been reported for highways, bridges, electrical power plants and schools.

Murray said the major surprise for construction industry this year has been the continuing strength of the single-family housing sector, which matched last year’s pace.

More dampening of consumer confidence, together with a weakening employment picture, should soon lead to reduced demand among homebuyers, but the lower cost of financing will keep some homebuyers in the market, he predicted.

He expects to see a moderate slowdown in construction of single-family homes that will likely continue through early 2002. As it appears now, the extended economic slowdown will mean a drop of 2 to 3 percent in the single family housing market for all of 2002.

Commercial building has been trending downward for most of the year.

F. W. Dodge data reveal the following dollar declines for the first eight months: stores down 10 percent; offices down 14 percent; hotels down 15 percent; and warehouses down 16 percent. The immediate question facing the commercial building sector, Murray said, is to what extent the uncertainty created by the current environment will cause projects to be placed on hold.

Nationwide, uncertainty will probably cause the shelving of a few commercial projects, although as yet there has been no indication of widespread postponements. Murray expects hotel construction will be the most adversely affected due to the weakness of the ravel and lodging sectors. He doesn’t anticipate an upturn in hotel construction until 2003.

As previously forecast, other commercial building categories should expect the weakening trend to continue through next year, with the rate of decline becoming less severe as 2002 progresses.

Murray noted that in office construction national vacancy rates remain close to 10 percent, a mark he describes as “a fairly healthy reading” by historical standards.

The publicly funded side of the construction market will experience a mixed impact from the events of Sept. 11. Less growth in public works projects is anticipated in light of tighter fiscal conditions and changing priorities. Some growth, however, will come from reconstruction efforts.

In the institutional building market, school construction should stay healthy because funds have already been provided through the passage of numerous bond measures, he pointed out.

Most likely, airport terminal construction won’t be as robust as it has been in the past few years, but airports could see a spike in construction related to security improvements.

The value of new construction starts is projected to be flat this year and the industry likely won’t see much strengthening until after the first half of 2002 when the prospects for renewed expansion should improve.

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