Growth Sputters in 2003

Sept. 28, 2010


Economic growth, which spiked during Q3/'02 largely because of incentive-induced auto sales, will likely settle down to a Q4 gain of only 1 to 2 percent, as temporary positive factors are overwhelmed by low consumer confidence and employment/income stagnation. Following 2001's 0.3 percent expansion, 2002 growth will be 2.4 percent. But even 2003's projected gain of 3.1 percent will leave the economy still operating well below its current long-term potential of around 4 percent.
Improved corporate profits and sustained growth in consumer spending should finally give businesses the wherewithal to increase capital spending, albeit at a rate considerably more moderate than during the late 1990s.
Continued low interest rates should spark consumer spending growth and a business investment revival, although uncertainties regarding the Iraqi situation will keep confidence skittish. Given legitimate concerns about the prospects for accelerated inflation rates in late 2003 and early 2004, long term interest rates will likely rise during 2003 a bit more than short-term rates.
Low mortgage interest rates and healthy rates of appreciation have sustained growth in residential construction activity far longer than would otherwise have been expected. A modest pullback is inevitable during 2003 as home values stagnate and labor market conditions only slowly improve. yet, the projected total of almost 1.6 million units will still exceed the average annual number recorded during the past decade.
The residential sector has steadily increased its share of total construction spending during the past several years, as average growth rates for both new home construction and remodeling (about 30 percent of the residential total) have outpaced the averages for both nonresidential building and heavy work. the publicly funded share of overall construction spending has steadily taken a larger share of the pie during the past 5 years as well.Tables:

Consumer and business uncertainty was almost palpable at the end of 2002, and 2003's economic outlook depends in part on these changeable attitudes and perspectives. But, if things go right, overall economic growth rates during 2003 will be at least a little bit stronger than during either 2001 or 2002.

Most forecasts assume the following general scenario. War with Iraq commences within the first six weeks of the new year. The quick conclusion and ultimate outcome is apparent by the early spring. Confidence returns to consumer and business markets, prompting an immediate spike in consumer spending, business investment, and the stock market. Then things settle down once again to a more sustainable pace of activity.

For the past two and a half years, however, businesses have been reluctant to invest. The stock market plunge and the depressing impact on corporate profits have provided little money with which to invest in new equipment or buildings.

This state of affairs won't last forever, but there will be a much less robust increase in capital spending during the early and middle stages of this economic recovery. If all turns out better than expected during 2003, we could see a euphoric rally in the stock market, in business investment, and in consumer spirits.

Concerns about jobs, terrorism and a future war with Iraq weighed heavily upon American consumers as 2002 ended. And all of this has made businesses reluctant to invest. A self-reinforcing cycle seems to have been established that has made it almost impossible for the U.S economy to gain any "traction," even a year after the nation's recession came to an end.

For the construction industry, the fluidity and unpredictability of the year ahead means that the direction of the global economy—with special emphasis on U.S. markets—is more important than ever. The combination of plunging business and consumer confidence, higher unemployment, and slow/no growth in household income, can't help but have negative implications for construction end-markets.

But the major positive force—the stimulative impact of low interest rates—will certainly continue to provide significant support for the industry during the year ahead. Although office and industrial vacancy rates have risen steadily throughout 2001 and 2002, they're still reasonably low by historical standards. And a bust on the order of magnitude anywhere near approaching that experienced in the late '80s/early '90s is highly unlikely, since supply of space has been added with great restraint and less speculation over the past decade.

The construction industry entered the recession in reasonably good shape. Although the rest of the economy struggled to keep its head above water throughout 2001 and much of 2002, the construction sector held its own as measured by total dollars spent.

Nevertheless, the forecasts in the accompanying tables show full-year-2002 growth that falls below the third-quarter 2002 trends. In general terms, this is because all objective evidence through September points to economic conditions that will be less favorable over the final three months of this year than over the first three-quarters of 2002.

Nonresidential Construction Trends$ BillionsAnnual % Change2003200120022003Source: U.S. Commerce Dept.Estimate and Forecast: Reed Business Information EconomicsThe extreme weakness experienced in nonresidential building markets is directly attributable to the depressed overall state of business capital spending. With corporate profits already starting to improve, there will be some money available during 2003 for new construction and/or renovations on existing buildings. The commercial and industrial sectors will benefit from the gradually improving economy, but institutional sector spending will grow more slowly during 2003 than over the past several years because of the severe budget shortfalls at state and municipal governments.Total Nonresidential Spending$286.70.4%-7.3%3.8%Commercial$108.5-4.2%-17.2%3.4%Office$40.4-6.4%-27.1%6.6%Retail$57.0-0.1%-6.6%1.2%Hotel/Motel$11.1-11.5%-25.9%3.7%Industrial$18.2-8.7%-40.8%5.8%Institutional$160.07.2%8.3%3.8%Healthcare$21.83.2%10.6%2.7%Private$16.74.7%9.2%1.2%Public$5.1-2.0%16.0%8.3%Education$84.611.8%13.3%9.1%Private$14.311.0%8.5%4.4%Public$70.311.9%14.4%10.2%Religious$8.83.6%2.2%3.5%Other Private$7.9-10.4%-11.1%-5.0%Other Public$36.97.4%3.7%-4.4%Heavy Construction Trends & Outlook$ BillionsAnnual % Change2003200120022003Source: U.S. Commerce Dept.Estimate and Forecast: Reed Business Information EconomicsConstraints imposed on public spending because of ballooning federal, state and local budget deficits should have a greater impact on public building construction work than on spending for critical infrastructure needs. Spending on highways, bridges, dams, and water supply systems—some directly related to homeland security priorities—will grow moderately during 2003. But spending for all sorts of privately funded projects—from electric power plants to telecommunications infrastructure to sports stadiums—is headed sharply lower.Total Nonbuilding Spending$154.54.5%-0.6%-0.3%Total Public Nonbuilding$97.56.2%-0.4%2.5%Highways & Streets$54.99.7%-3.3%5.1%Water$7.919.3%3.1%6.8%Sewer$8.9-0.6%7.7%-5.3%Conservation & Development$8.117.5%9.3%3.8%Other Public Nonbuilding$17.7-6.9%-1.2%-3.3%Total Private Nonbuilding$57.01.9%-0.7%-4.7%Telecommunications$14.7-1.4%-15.5%-5.5%Utilities/Other$42.33.5%6.0%-4.2%Construction Spending to Increase 1.6 Percent to $856.2 Billion$ BillionsAnnual % Change2003200120022003* Improvements Spending (for remodeling, renovation, and retrofit work) included in the total.Source: U.S. Commerce Dept.Estimate and Forecast: Reed Business Information EconomicsOverall construction spending should improve a bit during 2003, but growth will again be uneven. Nonresidential building construction plunged during 2002, as overcapacity in industrial markets and an excess of office and hotel space weighed heavily upon the sector. Following a solid gain in 2001, heavy construction couldn't hold its spending level in 2002 and will likely stagnate in the year ahead. The projected bounce back in the nonresidential market shouldn't be mistaken for a real sign of strength; rather it represents a transitional phase to moderate sustainable growth following two years when the sector couldn't even tread water.Total Construction Spending$856.22.7%-0.1%1.6%Residential New Construction$293.65.6%5.1%-0.2%Residential Improvements$121.4-0.4%7.5%3.%Nonresidential Construction*$286.70.4%-7.3%3.8%Nonbuilding Construction$154.54.5%-0.6%-0.3%Total Private Construction Spending$646.41.3%-1.5%1.0%Total Public Construction Spending$209.87.8%5.0%3.8%

The Weak and the Strong

These sectors will be the weakest this year, in terms of absolute declines or paltry growth in the actual dollar value of construction work completed:

  • telecommunications infrastructure
  • hotels
  • office buildings
  • retail buildings
  • industrial buildings
  • airport terminal construction and renovation projects
  • any public project requiring a substantial amount of state/local matching funding
  • convention centers, sports stadiums, movie theaters/theme parks/other recreational facilities

The strongest, in relative terms:

  • institutional buildings, especially educational and health-related
  • apartment buildings
  • retail buildings focused on consumer basics, such as grocery-store-anchored strip malls
  • back-up capacity for critical functions
  • security-enhancing redesign/renovation projects for the whole spectrum of existing private and public buildings