As 2002 dawns, the economy seems poised for a rebound. Consumers shook off the shock of Sept. 11 and its aftermath surprisingly fast, and many manufacturing sectors appear close to ending the slide in industrial production that began way back in the summer of 2000.
But for construction, the picture is more mixed. The timing and strength of an upturn will vary by region and industry segment.
In contrast to most downturns, consumers barely paused in their spending. Their spendable income remained high, thanks to three factors. First, the advance payment of 2001 tax reductions and permanent cuts in withholding put more money in many wallets. Second, the steep slide in mortgage and consumer interest rates enabled many homeowners and credit card borrowers to save on their monthly payments. Third, the plunge in oil and natural gas prices left more to spend on items other than heating, cooling and driving. In addition, employment remained high relative to most recessions, so that most families were not squeezed on spending.
Nevertheless, consumers have changed their habits somewhat. Department and luxury stores have seen business bypass them in favor of big-box and discount stores. This trend will be reflected in retail construction in 2002.
Consumers also have changed their travel habits. Resorts and hotels that depend on airline travelers are suffering from the cutbacks in both business and leisure travel. They've scrapped, shrunk or deferred construction and expansion plans. But destinations within driving distance of large populations, such as New England and Mid-Atlantic coastal and mountain resorts, are seeing an upturn that will lead to selective additional construction.
Business-oriented construction will have to wait a while longer to be invited to the party. There will be little new office construction until firms rebuild staff. Manufacturers will not need to expand factory capacity until later this year, even though there appears to be less excess inventory than in past downturns. Exporters in particular will not be needing more factories or storage for now, as the world economy looks a good deal weaker than the U.S. at the moment. Energy-related and utility construction will be depressed by the drop in energy prices and the slowdown in business demand for electricity and natural gas, respectively.
One bright spot may be import facilities. Sept. 11 taught many businesses that they can't be sure of a smooth flow of 'just-in-time' parts and supplies, so they may expand storage capacity 'just in case.' In addition, a reviving U.S. economy is likely to start buying more from abroad as well as from domestic producers. And a partial opening of the southern border to Mexican trucks may lead to a pickup in constructing factories, terminals and inspection facilities on the U.S. side.
Government-funded construction may be the most checkered pattern of all this year. The regular and 'emergency' appropriations that President Bush signed in late 2001 are sprinkled with a variety of public works. However, the federal budget situation has dramatically worsened since last summer. The fiscal 2003 budget he sends next month to Congress is likely to show substantial cutbacks in construction that is not tied to defense or domestic security.
The picture is darker at the state and local level. Most governments are feeling the twin burdens of tax receipts that are far short of last year's forecast and unbudgeted outlays for security measures, overtime pay, and unemployment and disaster relief. Consequently, all categories of state and local construction are likely to be pinched in 2002.
One category that straddles public and private construction is the very broad health-care construction heading. While public hospitals and clinics may face the same squeeze as other budget items, in general both sectors will spend more on health care and research. This will translate into stronger construction markets for medical offices, laboratories and other health-care facilities.
The most uniformly good news is on the cost side. Interest rates may have bottomed out but they should remain low all year. Fuel costs will show very favorable comparisons to the same month of 2001. Highway builders will benefit from lower asphalt prices, and all types of construction firms will be helped by lower costs for products that use petroleum or energy in their fabrication. Most other construction materials and equipment will also cost the same or less than they did this year. Labor cost pressures will be mild. Only insurance will be pricier. Unfortunately, that price increase will be huge, for all types of coverage.
In sum, 2002 will be a very uneven year for construction. Recovery from the slowdown will come at different times for different segments and regions. But all parts of the industry will enjoy lower costs, except for insurance.
