Construction spending will expand 3.4 percent this year, up only marginally from 2.7 percent in 2003. The construction cycle bottomed in 2002–03, and 2004 will be the first year of a multiyear growth cycle. Both the mix of projects and the trend over the year will be much different than last year.
The residential sector hit an exaggerated peak late last year, slightly more than offsetting the declines in other sectors that continued well into the year. Spending on new residential projects will begin strong in 2004, but decline slightly over the year; nonresidential and heavy activity will start the year at depressed levels and progressively improve.
The economic environment begins the year fair to good for private nonresidential and heavy projects and will improve over the year. Excess capacity will be shrinking, modest corporate profits will be expanding, business confidence is good and improving, credit costs (after inflation) are below average and will tighten only slightly, and money is flowing to real estate from the depressed bond market.
Yet the economic environment in the public sector begins the year depressed—still stuck in the last recession. Although it is expected to improve during the year, it will not catch up to the private sector until 2005.
The flow of additional money to public construction will be lumpy because it depends on the timing of political actions, such as permanent renewal of the federal-highway-funding program, passage of bond issues and legislation, and the next round of state budgets. Some project types and regions will see an injection of money before others. We expect fiscal year 2004–05 budgets that begin on July 1 or Oct. 1 to include significant gains in construction funding. This may be delayed a year in California and other states with the most serious deficit problems.
The consensus forecast for growth in gross domestic product this year is about 4 percent. Canadian and Mexican economic growth will also pick up to this level, adding to demand pressures in the United States. Manufacturing and exports will grow faster than the rest of the economy after a three-year slump. This pace will take much of the current slack out of labor, credit, equipment and materials markets, but not enough to cause significant supply problems in the construction market. But tight supply problems will likely develop later in 2005.
Expect the biggest growth turnaround in regional economies dependent on durable goods manufacturing, healthcare and medical supplies, and handling foreign trade with Asia. This includes New Jersey, Los Angeles and the Buffalo- Milwaukee corridor. Other hot spots may be the grain belt (prices have soared) and near military bases as the troops return.
But the national economic surge will have much less impact—especially early in the year—on regions dependent on public employment, education, packaged goods manufacturing, finance and business services. This includes New York, Atlanta, Boston, Washington, Miami and San Francisco.
Hot Markets in 2004
- Security related projects in nonresidential and heavy markets
- Biotechnology labs
- Residential major replacements and additions
- Neighborhood retail to serve new housing developments
- Healthcare facilities, including related offices
- Manufacturing, though it's still depressed
- Cellular network infrastructure for enhanced phone features
Cold Markets in 2004
- New residential units: cheap credit pulled 2004 buyers into the 2003 market
- Education: waiting for the recovery to generate more taxes
- Power: the building boom spurred by deregulation is over
- Highway: waiting for Congress to enact new six-year highway funding bill
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