The construction industry will continue to be one of the strongest sectors of the economy during 2002, according to leading economists and industry sources interviewed by Construction Equipment Guide (CEG).
“There’s a sense that the construction industry has been hurt by the weak economy but that’s really only true if you’re talking about commercial building,” said Robert A. Murray, vice president of economic affairs at the McGraw-Hill Construction Information Group’s F.W. Dodge Division in Lexington, MA. “Other sectors of the industry, whereas they’re not showing the same strong rates of growth as a few years ago, are at high levels by historical standards.”
Murray said the public works market (including highway construction), single-family housing and institutional building “have continued to show high levels of activity.”
A highly-respected industry economist, Murray told CEG: “For the full year of 2001, F.W. Dodge estimates that construction contract value is up 3 percent, based on the first 11 months. Our forecast for 2002 is for contract value to be down 2 percent; that would suggest that construction spending will essentially be flat or maybe up slightly. In levels of activity, we continue to proceed at a decent clip by historical standards. In rates of growth, there is no question across all sectors that we are looking at a changed environment from just a few years ago.”
The data which F.W. Dodge collects considers the value of projects at the time they begin. It is considered a broader gauge than contract value alone and a very reliable indicator for the future pattern for construction spending. Murray thus seems to set an upbeat note for the industry as a whole. Flat in terms of growth, but still churning ahead at a swift pace in highway, bridge, housing and much other construction.
The construction industry comprised 8 percent of gross domestic product (GDP), the total output of goods and services. Its performance, including public works, is thus a strong underpinning for the economy as a whole.
“Construction Outlook 2002,” issued by the McGraw-Hill Construction Information Group (and authored by Murray) states that “overall, the value of new construction starts in 2002 will stay close to this year’s [2001s] estimated $481 billion.”
Economic Outlook
A strong plus for construction is that the U.S. economy is widely expected to emerge from recession in the second half of 2002. The recession, two consecutive quarters of negative growth, is believed to have started last March.
McGraw-Hill’s Outlook 2000 said positives include low interest rates, low inflation and potential support from a federal stimulus package. Negatives include the impact of the Sept. 11 terrorist attacks, which deepened and lengthened an economic slowdown already underway. They also include a weaker fiscal position of state and local governments (a change from a year ago), reduced demand for commercial space and greater caution by the real estate community towards funding new projects.
“The general sense is that the economy will continue to be weak during the early months of 2002 but then will pick up strength as the year proceeds,” Murray said. “Overall, the rate of growth, given the slow start for the year, will only be about 1.5 percent, but it sets the stage for the economy to show 3 percent to 4 percent rates of growth in 2003 and 2004.”
The reheating economy may put upward pressure on prices, however, including equipment.
“Basically we’re looking at a low-inflation environment with low interest rates with the consumer price index [CPI] holding at about 2 percent,” Murray observed. “As the economy levels off and then begins to pick up strength at a 3 percent or 4 percent rate, inflation and rates will begin to creep up towards the latter half of 2002. Short-term inflation will stay benign and the low interest rate environment will hopefully help spur renewed investment by business.”
A downturn in government revenues is one of the larger concerns in this generally optimistic scenario.
“Many construction firms will keep busy for now with projects approved months ago by bond referendums, public utility commissions or last winter’s legislative sessions,” explained Ken Simonson, chief economist of the Associated General Contractors of America (AGC) in Washington, D.C. “But the downturn in federal, state and local revenues means that Congress, legislatures and county councils will be applying much sharper pencils in 2002 to construction [and other] spending requests.”
Simonson said he sees a silver lining to some of the negatives: “Interestingly, many of the economic forces that produce a gloomy outlook for construction activity also provide some cheer on the cost side. Notably, the dive in oil prices means that contractors will pay far less in 2002 than in the previous two years to fuel their trucks and off-road equipment. Similarly, the world economic slowdown has brought down the prices of steel, lumber and many other construction materials.
“Excess capacity in manufacturing should mean attractive equipment prices. Interest rates for financing that equipment, and for construction financing, should be very low in 2002, at least for firms with solid credit ratings. And the rise in unemployment means workers will be easier to find and to keep. The only cloud on the sunny cost scene is insurance, which is sure to be both expensive and less available.”
Highways and Bridges
Murray said the value of starts in the entire public works sector in 2001 was approximately $83.3 billion, a 7-percent increase over 2000. He predicts this will be about the same in 2002: about $83.5 billion.
The highway and bridge portion of public works grew 6 percent in 2001, Murray added, with starts valued at $43.5 billion. He said this is expected to grow 2 percent in 2002, to $44.4 billion.
Any recession in highway and bridge construction? “Absolutely not,” Murray replied.
Dennis Day, AGC’s senior director of public affairs, said that “in general public spending for construction, including highways, bridges and other types of infrastructure, will remain high; overall appropriations are about the same as last year.”
Day added that public construction was the main reason that construction spending was “up about 5 percent in 2001” and said he believes that activity will “probably remain about the same in 2002” which he said “could be a relatively flat year overall” in terms of increases over already high levels.
The American Road & Transportation Builders Association (ARTBA) in Washington, D.C, has issued a very optimistic prediction for the highway and bridge sector. Its Transportation Construction Outlook for 2000 states this sector should grow 3 percent to 6 percent in 2002, following solid growth of 9 percent in 2001.
“2001 was almost a record year for highway and bridge construction, which was up 10.4 percent over 2000 as of the end of November,” Dr. Bill Buechner, ARTBA’s vice president of economics and research, told CEG. “If that increase holds up through December, total highway and bridge construction in 2001 will come in at $62.2 billion. When you apply the forecast of 3 to 6 percent growth to this, we would expect this year’s figure to be somewhere between $62 billion and $64 billion. This should have a positive effect on the economy.”
Buechner added that “in general, the highway construction program for 2002 seems to be pretty well recession-proof, largely because this is one part of the budget which is funded out of dedicated revenues for most states.”
Buechner commented that “in 2002, transportation construction should continue to enjoy its reputation as the construction market least affected by an economic recession.”
ARTBA’s outlook warns, however, “The one potential negative in the outlook is the impact of the recession on state transportation budgets in Fiscal Year 2002. Overall, state revenues are currently running $15 billion below FY 2002 estimates, according to the National Association of State Budget Officers, due to the slowdown in sales and corporate income tax revenues that was exacerbated by the Sept. 11 terrorist attacks.”
ARTBA’s has surveyed 30 of the larger states about this by telephone. “Our survey showed that, in general, the states that depend of dedicated revenues, like a gas tax or motor vehicle registrations, are not going to have any problems funding their programs,” Buechner said. “The states that are having problems are the ones that rely on general funds. Colorado is an example. It is having state budget problems so it’s cutting the general fund contribution to its highway program.”
ARTBA’s outlook states that “while some state DOTs have experienced modest revenue shortfalls, most say they will maintain their 2002 letting programs … so we expect few cuts in state spending for highway and bridge projects.
“All in all, 2001 was a bodacious year for transportation construction,” it states.
ARTBA said federal highway funding will increase more than 6 percent in Fiscal Year 2002. It also states that core funding for this year under 1998’s six-year Transportation Equity Act for the 21st Century (TEA-21) is almost $33 billion, including both the guaranteed amount and additions allowed because of growth in gas tax revenues. This is about $2 billion more than core funding in Fiscal 2001.
If Congress includes a large highway component in its emergency fiscal stimulus program, the projected growth in the highway and bridge sector is expected to increase by approximately 2 percent.
Airports
Airport runway, taxiway and other airside construction was up 41.7 percent in 2001. Airport-related construction will continue to benefit from full funding in 2002, receiving $3.3 billion under the Aviation Investment and Reform Act for the 21st Century (AIR-21).
“We figure that, as things get back to normal post Sept. 11, airport construction projects which may have been put on hold for a couple of months will get back and revamp,” said Day. “They may include additional security construction-type programs.”
Smaller airports, which have had a large backlog of needs, were least affected by any slowdown from the decline in air travel caused by the terrorist attacks.
Sources indicated, however, that construction at larger airports, which is financed largely through passenger facility charges (PFCs) and bonds, have been hit harder by the travel and economic slowdown.
ARTBA’s outlook points out, however, that PFCs mainly finance terminal, hangar and other building construction, adding, “Some runway projects may be postponed at larger airports but most were far in the future anyway and should not materially affect the 2002 construction outlook.”
The outlook also states that “a gain in 2002 of 10 to 20 percent in the value of construction work performed on runways and other airside projects would not be surprising.”
Mass Transit
The ARTBA outlook states that “2001 was a boom year for subway and light rail construction as the increased transit funding in TEA-21 finally kicked in — and 2002 may be even better.”
Congress provided a 7.6 percent increase in federal funding for mass transit programs for fiscal 2002, including $1.115 billion for subways and light rail work.
New contract awards by state and local governments for rail projects were up 75 percent in 2001. Activity is to continue at a record high level in 2002.
Housing
The housing market in general is another positive. It was up in 2001 and is expected to continue at about the same high level in 2002.
“Housing has done remarkably well compared to past recessions; if you look at housing, you wouldn’t know there’s a recession going on,” said Mike Carliner, economist with the National Association of Home Builders (NAHB) in an interview with CEG. “Housing starts in 2001, when all data is in, should be above 2000 in terms of numbers of units as well as value of construction. 2002 will be down slightly but the difference will be so small as to be almost measureless. Basically, the housing market is flat but flat at a high level.”
NAHB noted that the final total for housing starts in 2001 is expected to be approximately 1.65-million units, up about 2 percent from last year. Nationwide starts rose 8.2 percent in November to this seasonally adjusted annual rate (1.26-million single-family units and 384,000 multi-family units.)
Good weather contributed to a more than 20 percent rise in new housing in the Northeast and Midwest, NAHB said. Starts rose 12.7 percent in the West and declined 1.6 percent in the South, the nation’s largest housing market.
“During 2001, housing was stronger in the beginning of the year than at the end; in 2002, the beginning should be weaker than the end,” Carliner said.
Carliner cited these reasons for the housing’s strength and good outlook. “We have not had the kind of speculative building and inventory correction which we’ve had in past cycles. Part of that may be that builders and lenders are smarter or more cautious.
“A second factor is that we’ve seen some significant appreciation in house prices the last couple of years after relatively slight appreciation earlier in the decade. Normally, as prices go up, people buy less but the combination with relatively slow inflation means that prices aren’t too high and the acceleration has had a positive effect on demand. If that goes on too long, you get a bubble and get in big trouble; but the right amount of each is probably a positive force so that the market, in general, looks pretty good.
“Thirdly, we had so much trouble finding enough labor and materials that builders had trouble keeping up with demand. That has eased off quite a bit. We haven’t really had a slump.”
NAHB President Bruce Smith told a recent meeting that ’the prospects for 2002 also are positive.”
McGraw-Hill’s Construction Outlook 2002 is slightly less sanguine. Based on results at the end of the third quarter, it projects 1.175-million single-family starts in 2002 “a 2- percent decline, which translates into no change in dollar terms.” It states the value of these starts is $183 billion, adding, “A major plus for the construction industry during 2001 has been the strength for single family housing.”
Income Properties
The income property sector, which includes commercial building plus multi-family housing, is one of the industry’s current losers. Murray said this sector was down 9 percent in dollar volume in 2001 “and we’re looking at another 5-percent drop in 2002; if we consider only commercial building, the drops are even deeper.”
McGraw-Hill’s Outlook states, “The steepest decline is projected for hotels, while stores, warehouses and offices will experience more moderate retrenchment. Apartment construction is the income property type most likely to avoid a decline, since it continues to be viewed favorably as a target by the real estate finance community.”
The value of starts in this sector is projected at $101.1 billion in 2002.
Institutional Building
McGraw-Hill predicts the institutional sector will advance 3 percent in 2002 “due to further expansion for schools combined with a moderate increase for healthcare facilities” but adds, “Reduced contracting is expected for courthouses, churches, amusement-related projects and airport terminals.”
The educational building category has responded strongly to needs from rising enrollments, rising 6 percent to 268 million sq. ft. in 2001 and is expected to increase another 3 percent to 275 million sq. ft. in 2002. This would be a record annual total. The expansion is most evident in the West.
Construction of healthcare facilities is expected to rebound from a correction due to provisions in the 1997 Balanced Budget Act. A 4-percent recovery is expected this year to 83 million sq. ft. of new construction.
“Construction still looks strong in medical facilities,” Simonson said. “Use of medical services has remained high, encouraging hospitals, clinics and other providers to add capacity.”
A weakening is expected in prison construction, which has hovered in the range of 20 to 25 million sq. ft. A drop in prison population, the first such decline since 1972, is reportedly reducing demand.
The projected value of starts in the institutional sector this year is $87.7 billion.
Utilities
Construction of power generation plants boomed in 2001, but is expected to taper off (though still at high levels) in 2002.
“We are looking at a greater than 50-percent increase in 2001 in dollar value of starts, and expect a 25-percent decline in 2002,” Murray told CEG.
McGraw-Hill’s Outlook states that “electric utilities, following robust growth the previous four years, will begin to settle back as the post-deregulation surge in new power plant construction eases.”
The value of starts for utilities in 2001 was about $17.5 billion, which could decline to $13.12 billion in 2002 under Murray’s scenario.
Manufacturing
Manufacturing building is expected to edge up 2 percent, the Outlook states, “as its extended four-year decline reaches bottom in early 2002.
“The category will be extremely weak by historical standards,” it adds, “down 35 percent in dollar terms from its most recent peak, 1997.”
Capacity utilization fell to 73.8 percent in September 2001, the lowest level since 1983, when the economy was emerging from recession. Industrial production also continued to weaken during 2001.
“Over the next several quarters, manufacturing plant construction will stay very weak,” states Outlook 2002, “essentially holding at recession lows as contracting languishes in the range of 90 to 100 million sq. ft. The strengthening economy in the latter half of 2002 will help provide the start of an upward trend for this category, allowing 2002’s annual total to rise 2 percent to 102 million sq. ft.”
Value of manufacturing starts in 2002 is predicted at $9.2 billion.
Construction Equipment
The recession has reduced demand for construction equipment. The Construction Industry Manufacturers Association (CIMA), which consolidated with the Equipment Manufacturers Institute (EMI) on Jan. 1 to become the Association of Equipment Manufacturers (AEM), said in its annual forecast, “Construction machinery manufacturers participating in CIMA’s annual Outlook survey expect year-end business in the U.S. to drop 12.8 percent by year-end 2001, and record 0.5 percent growth in 2002.”
It said worldwide business was expected to drop 2.7 percent for 2001, followed by a 1.1 percent decline for 2002.
CIMA conducted the Outlook report in the third quarter, receiving most responses before the Sept. 11 attacks.
“Dealer and contractor purchasing is still conservative as they take a wait-and-see attitude on the future of the economy despite the past strength in housing markets and infrastructure pent-up demand,” said Robert J. Fien, who was chairman of CIMA at the time.
The Outlook reported 2001 declines in sales in every category of equipment, particularly lifting equipment (-22.9 percent), but sees increases during 2002 in sales of bituminous machinery, attachment/components, concrete/aggregate equipment, light equipment and miscellaneous equipment.
The Outlook expects declines during 2002 in only two types of equipment: earthmoving machinery (-1.3 percent) and lifting equipment (-5.7 percent).
The upturn will be part of an industry which is still very healthy despite struggles in a few sectors. 2002 may not be bodacious but it should be a good, even better, year for construction, experts predict. CEG
Today's top stories
