Construction Recovery: Wait 'Til Next Year

By Jim Haughey, Chief Economist, Reed Construction Data | September 28, 2010
Value of Total Construction Starts
Monthly data is very volatile, but June's 30-percent construction-spending free fall suggests that the industry is far from any solid recovery. Residential and nonresidential building construction made up the vast majority of June's plunge, but heavy engineering did in fact fall 7.7 percent.

Construction spending will continue to drift lower for the rest of the year as it has since the beginning of the year. This is the net of now rapidly declining nonresidential building construction, initial recovery in the residential market, and developing weakness in the heavy-construction market. The result is a forecast 11-percent decline in 2009 total construction spending largely due to huge residential- and nonresidential-building declines in November 2008 through January 2009. No significant impact from the stimulus plan is yet evident, but is still expected this summer along with a rise in single-family residential spending (annualized residential building permits increased from 518,000 in May to 563,000 in June).

The value of construction starts reported by Reed Construction Data fell by a third from an exaggerated peak last August to May 2009, then plunged to one-third of the August peak in June. Some pickup from the unusually low June level is expected this summer, but the pipeline of work in progress has shrunk enough to assure declining jobsite activity into the winter.

Heavy construction spending, measured in current dollars, was near last year's peak level at press time. However, the drop in materials cost for heavy construction since last year means that jobsite activity has, in fact, increased slightly. The June price index for heavy construction materials is 11.6 percent below a year ago.

A 5- to 6-percent decline in heavy-construction spending is expected by year end, with an overall drop for the year of about 1.7 percent. It is expected to be brought about by a pullback in energy-related construction, the imminent bankruptcy of the federal Highway Trust Fund and some state funds, as well as spending cuts by many states in response to the sharpest drops in state tax collections in more than 50 years.

Highway construction spending has been slipping lower for 2 years apart from a brief surge in materials costs last summer and fall. Highway Trust Fund balances have been weakened by the recession and high fuel costs. Bonding and appropriations are now being reduced by plunging state budget balances. Stimulus funds will be spent too late to generate any increase in highway construction this year, but will boost highway activity 10 percent in 2010.

Power construction spending increased 2.1 percent in May, and has nearly tripled in the last 5 years. This surge was due to expanded electric generation, addition of alternative-energy generating stations and a rapidly expanding domestic natural gas industry. Electric generating needs drop quickly during a recession, though; significant surplus capacity has appeared. Power-station starts deferred or cancelled have caused investment in natural-gas capacity to slow. Utility managers are reluctant to invest in new coal- or gas-generating plants while President Obama's carbon tax request is pending in Congress.

Water- and sewer-construction spending has remained about steady for almost 3 years apart from several wide swings in materials cost. Spending for treatment plants is higher than a year ago, but this is partially offset by a decline in water and sewer line construction as new site development has declined. Spending will resume growing modestly in late 2010 due to resumed growth in site development, both residential and commercial. But major projects will be deferred for another year until state and local government budgets recover.

Nonresidential-building construction spending has been stalled for three months at about 2 percent above the depressed winter level. But monthly spending will slip 8 to 10 percent lower over the next year. Reed Construction Data reports that the value of June starts plunged for all nonresidential categories, both public and private. Fewer projects in the pipeline will cause monthly jobsite spending to progressively decline. Healthcare and education will hold up best. Resumed growth is about a year ahead.