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Tax cuts pave the way to a brighter 2004

State governments will receive $6 billion and local governments $4 billion for schools or other institutional construction

By Robert Cassidy, Editor-in-Chief

June 1, 2003

Building Design and Construction

Not one, not two, but three chief economists who specialize in construction forecasting see sunnier skies for the nonresidential building industry next year.

Kenneth D. Simonson, chief economist for Washington-based Associated General Contractors of America, says passage of the "Jobs and Growth Tax Relief Reconciliation Act of 2003" could stimulate demand for construction by providing $210 billion in relief to individual taxpayers and states over the next 16 months.

State governments will receive $6 billion and local governments $4 billion that could be used in part for schools or other institutional construction, says Simonson. States will also receive $10 billion for Medicaid, which could enable them to avoid deeper cuts in other budget areas, including infrastructure spending.

Jim Haughey, chief economist for Reed Business Information (publisher of this magazine), sees "a huge stimulus to the economy" from the combined impact of the tax cuts and new aid to states, totaling $61 billion in fiscal 2003 and another $149 billion in FY 2004.

"There will be a significant immediate impact on spending in the economy that will spill over into nonresidential construction," says Haughey.

He points to the fear of deflation, not just job creation, as a key factor that got the tax bill through Congress. "Bush and Greenspan want to keep the U.S. out of the deflation disaster that Japan has been stuck in for years, and that Germany is on the brink of entering," says Haughey.

At the Portland Cement Association, Skokie, Ill., chief economist Edward J. Sullivan points to "robust economic activity" in 2004, with nonresidential construction spending expected to become a "growth leader" by the end of next year.

Sullivan says consumer spending should increase in coming months, which would translate into sustained improvement in manufacturing. Nonetheless, he does not anticipate any "meaningful improvements" in industrial construction until year-end.

As for office construction, don't expect a turnaround before mid-2004 at the earliest, says Sullivan, even with office vacancy rates peaking this summer. That's due to the 12-to 15-month lag normally associated with this sector. Retail construction, on the other hand, may resurface late in the third quarter of '03.

With the war in Iraq essentially resolved, Sullivan sees a "rapid and strong release of investment spending" to pick up in the third quarter, due to pent-up investment demand. He anticipates job creation in excess of 100,000 a month by the end of summer.

One impact of ramped-up economic growth could be a jump in interest rates, possibly as early as mid- to late-third quarter. While any Federal Reserve rate rise would dampen sales of single-family homes and multifamily rental properties, Sullivan sees condominiums remaining a "relatively steady sector" within the multifamily arena.

More info: simonsonk@agc.org; esullivan@cement.org; jhaughey@reedbusiness.com.