Status and Forecast

By Jim Haughey, Director of Economics | September 28, 2010

Total Construction Spending

Total construction spending dropped an outsized 1.1 percent in December, bringing the 2007 decline to 2.7 percent. Small declines will continue at least into the spring, before a turnabout in residential construction begins. Overall spending will gain 1.4 percent in 2008, which is still an approximate 3-percent decrease after subtracting project cost increases. Construction spending growth has already begun slowing for heavy/engineering projects, institutional buildings and especially commercial buildings.

Highway Construction Spending

After three quarters of no growth, highway construction spending jumped 6 percent in the fourth quarter, which is the start of the new fiscal year for most states. Spending is currently 12.5 percent above a year ago, but most of the increase is reflective of project cost hikes. Highway trust fund balances are too low to support an increase in construction activity in 2008, but expected fuel-tax increases and private funds will prevent any decline in activity levels.

Construction Equipment Price Index

Construction equipment prices are up 2.2 percent over the last year, but have been steady for the last three months. Ahead, prices are likely to be steady or even down slightly early in the year, when construction activity is declining. A return to 2- to 3-percent annual price increases is forecast for late in the year and through 2009. This will be driven by resumed growth in construction spending and a likely 15-percent spike in steel prices.

Gross Domestic Product

GDP growth slipped to an annual rate of 0.6 percent in the final quarter of 2007, but will likely be revised lower to near flat. Two more subpar-growth quarters are expected in early 2008. One, possibly both, could be negative. Still strong export growth to a very strong world economy, and quick and aggressive monetary and fiscal stimulus will prevent the slowdown from becoming a serious recession. Growth will return to a 2.5-percent or better pace by late in the year.

Industrial Production

Steady since last June, industrial production will dip slightly in the first half of 2008, recover at least to the current level by the end of the year, and then expand2-percent-plus in 2009. The weakness in early 2008 is the inevitable cutback to reduce excess inventory following the abrupt slowing of spending across the economy late last year. The manufacturing production cuts will be concentrated in vehicles, construction supplies and industrial equipment.