2002: Another memorable, significant, year for the construction industry. A major event during the year, capturing worldwide attention, was completing the cleanup of the World Trade Center rubble from the 9/11 terrorist attacks in September, 2001. Poignant ceremonies on May 30 (Memorial Day) marked the conclusion of a staggering project, consuming 3.2-million construction man-hours, which removed 1.67 million tons of debris and cost an estimated $650 million.
Work also proceeded around the clock during the year to rebuild the areas of the Pentagon, which were severely damaged in a separate terrorist attack. The charred, gaping gash in the side of the famed structure was repaired, while many interior areas were restored. By the Sept. 11 anniversary, approximately 3,000 of the 4,600 people displaced by the attack had returned to the building.
A very heartening drama unfolded in July. As the world watched, construction workers rescued nine coal miners trapped 240 ft. below the earth at the Quecreek Mine in Pennsylvania. As the seconds ticked away — and the water rose around the men — the industry rushed equipment and people to the scene, drilling holes into the earth, sending compressed air down to the miners, and pumping out water. Finally, shortly after midnight on July 28, operator Brad Hillegass, coolly managing his 40-ton crane, lifted them out, one by one, in a rescue basket.
Legislation
Other major events occurred on the legislative front. The Bush Administration’s economic stimulus bill, signed into law in March, included a 30-percent depreciation bonus for new equipment purchases.
“You’d definitely have to put the new law at the top of the list of events affecting construction during the year,” Christian Klein, Washington, D.C., counsel of the Associated Equipment Distributors (AED), told Construction Equipment Guide (CEG). “Since that law was signed, there has been a significant increase nationwide in equipment purchasing. Business investment has gone up across the board, both in construction and other fields. The depreciation provision is a very, very significant development which will help our economic recovery, as everyone anticipated when we were working on the legislation.”
Contractors now can depreciate 30 percent of the value of the equipment when they purchase it. During the first year, they also can depreciate 20 percent of the remaining 70 percent. They then depreciate the rest according to the normal rules.
The successful effort to restore funding for the Fiscal 2003 highway budget also was very significant. Early in the year, the Bush Administration proposed dropping the highway program from Fiscal 2002’s $31.8 billion to approximately $23.4 billion. The construction industry successfully lobbied for a much higher amount, which will be at least $27.7 billion and perhaps close to last year’s level when Congress finalizes the funding (which is now provided under a continuing resolution) in 2003.
“All the communications from the grassroots of the construction industry in that fight sent a very strong message to Congress that transportation programs have a very, very strong constituency,” Klein said. “This was very important because the TEA-21 transportation bill will be reauthorized in 2003.”
The Terrorism Risk Insurance Act, passed just before Congress adjourned, was another major legislative accomplishment.
The new law means more jobs and more equipment sales. An estimated $14 billion in commercial construction projects were not started because contractors could not find insurance.
The Federal Government will pay 90 percent of the claims related to terrorist attacks if the total losses exceed $10 billion in 2003, $12.5 billion in 2004 and $15 billion in 2005. The program is capped at $100 billion.
Proposals in Congress affecting construction firms included making last year’s repeal of the “Death (inheritance) Tax” permanent after the repeal expires in 2010, and eliminating the double taxation of dividends. These issues are certain to be part of the administration’s tax reform package in 2003.
The construction industry generally cheered the results of the November mid-term elections, which gave Republican majorities to both the Senate and House of Representatives.
“The shape of the new Congress is more friendly to a pro-growth policy than the previous Congress,” Klein observed. “By pro-growth, I mean things like tort reform, economic stimulus, and making death tax reform permanent.”
In December, President Bush named John W. Snow, chairman of CSX Corp., as the new secretary of the treasury. Snow was deputy undersecretary of transportation under President Gerald Ford, and served as administrator of the National Highway Safety Administration from 1976 to 1977.
“I think this choice is a plus as far as understanding transportation issues,” said Dennis Day, a spokesperson of the Associated General Contractors of America (AGC) in Washington, D.C. “We absolutely look forward to working with him on tax incentive issues, which will benefit construction industry firms.”
Healthy Pace
The total value of construction starts during the year is estimated at $498.9 billion, according to the annual report on the industry by McGraw-Hill Construction in New York, NY. This would be a 1-percent increase over the $496.2 value of starts during 2001. The slight uptick generally jibed with expectations.
“We had been calling [in last year’s CEG forecast] for a flat pattern of activity and that in fact came to pass,” said Robert A. Murray, McGraw-Hill Construction’s vice president of economic affairs. “Single family housing starts rose much more than we expected and commercial building starts declined more sharply, but overall results were about the same.”
The pace was viewed as healthy, but not accelerating as in previous years.
Total starts during 2001, for instance, had increased much more: 5 percent over 2000. The pace this year was much slower than the past three years of the 20th Century where the annual increases were 11 percent (1999), 12 percent (1998) and 9 percent (1997).
Nevertheless, the industry, led by the public works and single family housing sectors, remained a strong (but somewhat faltering) engine for the U.S. economy. AGC’s Day called 2002 “a mixed bag.”
“Some sectors were able to offset the down sectors,” he said. “We certainly don’t want everyone humming along at great levels and everyone dropping as well. It has probably been beneficial for the economy that some sectors have remained high.”
The Economy
The economy emerged from recession in 2002, most economists say. It was definitely in recession in 2001 when growth domestic product (GDP) declined for three consecutive quarters:
• .6 percent in the 1st quarter,
• 1.6 percent in the 2nd, and
• .3 percent in the 3rd.
But, since then, GDP grew 2.7 percent in the 4th quarter and this growth continued all through 2002 (5 percent in the 1st quarter, 1.3 percent in the 2nd, 4 percent in the 3rd, and roughly 1 percent or 2 percent in the 4th.)
The rate of growth for 2002 is put at about 2.5 percent compared with approximately .3 percent in 2001.
“I would say 2002 was a flat year, but up slightly from 2001,” Murray told CEG. “The economy is holding up.”
Inflation remained low. Construction costs (except for insurance) were flat or falling.
Public Construction
Highway and bridge construction starts during 2002 were estimated at $44.7 billion, a 3-percent increase over 2001, with total public works construction starts valued at $88.2 billion.
Although observers said the pace slowed during the year, highway projects continued to benefit from the 16-percent funding increase in 200l.
Construction was strong because of projects approved when states and the federal government were in surplus.
Bridge construction was boosted by the start of several major projects, including the $1-billion-plus replacement of the San Francisco Bay Bridge, a $203-million bridge in Toledo, OH, and a $108-million segment of Boston’s downtown central artery reconstruction.
Airport-related construction starts were down 10 percent from last year through the first nine months of 2002, reflecting, in part, reduced travel as a result of the 9/11 attacks.
The McGraw-Hill report said there was a 28 percent decline in new terminal construction but a 7-percent gain for runways. (Airport and runway construction had been up 45 percent during the 1999-2001 period compared to the previous three years.)
Observers said a general slowdown is under way in the public works sector.
“Public construction is holding firm so far but looking shaky for the future,” said Kenneth D. Simonson, AGC’s chief economist. A 3-percent decline is expected in 2003 (see CEG’s forecast 2003 article in our next issue).
The slowdown that became evident in 2002 reflects, in part, the federal deficit of $152 billion in Fiscal 2002. Meanwhile, state governments, which by law are not permitted to run deficits, have seen balances at the end of the 2002 fiscal year shrink from an average of 10.4 percent of expenditures to 4.8 percent. Not only did states cut spending as fiscal conditions tightened, but they had a tougher time receiving voter approval for new bond issues, which finance much of their construction.
“By midyear, most states had to cut spending at least once to match falling revenue,” said Simonson.
Housing and Commercial
In one of the year’s brightest notes, The National Association of Home Builders (NAHB) in Washington, D.C., reported an unexpected record number of starts (1.34 million) in single-family housing and record sales of new homes (953,000).
Simonson observed: “Few analysts thought that 2002 could turn out better than 2001 for homebuilding and home remodeling; yet, that is just what happened, thanks in large part to mortgage rates that dropped to levels not seen in more than 40 years.”
The downside is that, as more tenants turn into homeowners, vacancy rates in rental housing have been rising. At the same time, the downturn in commercial building, including offices, warehouses, and hotels, turned out to be more severe than expected.
Among the reasons: a substantial amount of sublease space was put back on the market as the “technology bubble” burst, employment fell, banks tightened lending standards, and insurance costs rose.
Construction starts for commercial properties, excluding multi-family housing, dropped an estimated 16 percent during 2002. The office sector alone plunged 29 percent, with 160 million sq. ft. in new starts. Hotel construction also fell 29 percent, to 40 million sq. ft., while contracting for new stores dropped approximately 11 percent to 250 million sq. ft.
Likewise, there was little demand for building new factories or warehouses.
Indices of industrial production went from modest upturns in the first half of 2002 to accelerating declines by late in the year. Factory utilization slipped to 73.5 percent of capacity in October, barely above the recessionary level of a year before, and contracting fell 25 percent to 185 million sq. ft. Multi-family housing starts fell an estimated 4 percent, to 395,000 units.
Utilities
Construction of water supply projects climbed an estimated 9 percent during the year, boosted by such projects as the $242-million Arrowhead water tunnel in San Bernardino, CA, and the $153-million expansion of a water filtration plant in Atlanta, GA. The tremendous expansion of residential and commercial development during the 1990s greatly increased demand for water lines and filtration plants, especially in the South and West.
Construction of sewer lines increased an estimated 17 percent during 2002, led by such projects as Atlanta’s $1.9-billion, 14-year wastewater system upgrade, the $164-million combined sewer overflow facility in Providence, RI, and the $153-million water pollution control plant in the Bronx, NY.
River/harbor development projects advanced 21 percent. Although power plant construction continued at a high level through most of the year, cancellations outstripped new orders for most months. McGraw-Hill Construction said that “new construction starts for electric utilities are now in retreat” and estimated that contracting in 2002 has plunged 39 percent.
Institutional Buildings
Institutional building, led by a boom in school construction, is expected to close the year with starts valued at $93.8 billion, up 3 percent over 2001’s record high. An estimated 585 million sq. ft. was built or under construction, very close to 2001’s record of 589 million sq. ft.
The entire educational building sector was close to last year’s all-time high. During 2002, new school construction totaled 272 million sq. ft., led by colleges/universities and junior high schools.
Construction of healthcare facilities rose 11 percent, while other public building sectors, except for police/fire stations, fell.
Contracting for amusement facilities fell 12 percent.
Rental Market
The year 2002 wasn’t a particularly good one for equipment rentals.
“The continued downturn in commercial construction has had a negative impact on the rental revenue and profits of dealers during 2002,” Matt DiIorio, AED’s vice president of marketing in Oak Brook, IL, told CEG. “Although strong housing starts and roadbuilding have helped, contractors haven’t replaced fleet. However, the equipment is aging and becoming more expensive to operate and maintain, so we think contractors will begin replacing fleets in 2003.”
AED reported that its annual business outlook survey of equipment dealers, which included 240 respondents, showed that 37 percent of them laid off employees in 2002 (though only 15 percent expect to lay off in 2003). 91 percent of respondents said markets had not rebounded in 2002. Rental rates continued to decline.
United Rentals Inc., the largest equipment rental company in North America, reported that its rental rates were down 6.1 percent in the third quarter of 2002 compared with the third quarter of 2001.
Consolidations continued, but they mostly involved dealerships for large manufacturers, with less activity among national rental companies, perhaps because less capital has been available in the business downturn.
Equipment Manufacturers
The Association of Equipment Manufacturers (AEM) in Milwaukee, WI, reported in its annual survey of construction machinery companies that these companies expect to finish the year with overall business declining 5.6 percent from 2001, business volume to Canada dropping 2.8 percent by year-end, but sales to other worldwide markets growing by .8 percent.
On Jan. 1, 2002, AEM officially began as the consolidation of the Construction Industry Manufacturers Association (CIMA) and the Equipment Manufacturers Institute (EMI).
AEM said unit sales in the United States declined in the following areas: earthmoving equipment, 8.7 percent; lifting equipment, 14.9 percent; concrete/aggregate machinery, 1 percent; and light equipment, 3.6 percent.
Contracting for manufacturing plants in all fields fell to an estimated 70 million sq. ft., a low for the past 40 years, and 50 percent below the most recent peak of 191 million sq. ft. in 1997. All sectors were down except the automotive one.
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