Economic outlook for construction continues to decline in 2009

August 11, 2010


On July 23, three economists in the construction industry provided an economic outlook of the

United States for 2009-2010.

Jim Haughey, PhD, is chief economist for Reed Construction Data with 30 years of experience as

a business economist.

Ken Simonson, PhD, is chief economist at AGC of America with more than 30 years of experience

as a business economist.

Kermit Baker, PhD, is chief economist at the American Institute of Architects who originated

the Consensus Construction Forecast Panel.

According to Haughey, the country’s overall foreclosure problem is getting worse, and President

Obama’s foreclosure prevention plans are ineffective even with loosened rules. The President’s

plans for taxes to pay for healthcare and reduce carbon emissions, along with a consumer

financial regulator, make the public uneasy about economic recovery. The cost of high credit

will be extended for several years, Haughey said, because serious credit access problems exist

with national and regional banks.

Is stimulus working?

The President and Congress don’t know how to prove that the stimulus funds are working. Haughey

said the stimulus is working, but Washington is using data that are out of date and can’t

provide current figures to convince the public that stimulus funds are distributed and are

helping local governments and private enterprises. Haughey cited figures that showed GDP

increased 2-3% in 2009 spring and summer quarters, but will be falling in the next year.

Haughey predicted that the economy will be in a deeper recession with low credit rates now that

will increase, perhaps, next year. From Q4 in 2008 to Q3 in 2009, the GDP will decline 3% and

from Q4 in 2009 to Q4 in 2010, the GDP will increase 2.1%. For the construction industry,

Haughey sees steep declines through summer and rising in early 2010. He sees material prices

rising again and rising faster than overall inflation by late 2010.

The nonresidential construction industry will see slow GDP growth into 2011 with tighter credit

approvals and rates that will gradually rise. A space surplus for all types of building will

peak within the year and remains high. Haughey emphasized that public construction has been

restrained because of lowered tax receipts and budget deficits in various governmental units.

Commercial projects fall

A significant decline in nonresidential construction will occur for the remainder of 2009.

Retail is overbuilt, hotels have been hit with loss of credit and rising vacancy, and office

construction dropped because of layoffs in the finance and professional service markets. Heavy

construction will be weaker even as stimulus funds keep the downturn mild and brief, but

highway construction is threatened by the collapse of the trust fund.

Simonson said construction spending from May 2009 to May 2010 will fall 12%, with most of the

decrease in private residential construction. The stimulus package will help the construction

industry to a degree, he said, but not enough to offset the downturn in residential

construction. In addition, material prices are uncertain with lower prices predicted for

diesel, copper, steel and aluminum; possible higher prices for concrete and gypsum; and

wavering prices for asphalt until the end of 2009.

Because the construction industry depends on specific materials in demand worldwide and are

usually heavy, Simonson said the industry will experience price swings that will increase the

Producer Price Index up to 8%. Although material prices may fall, labor prices will increase.

Housing at near bottom

As construction employment falls across the country, wages will rise. Only two states saw an

increase in construction hiring: North Dakota, up 5%, and Louisiana, up 4%. North Dakota, in

the Construction Bulletin region, has increased employment because of oil discoveries which

prompted hiring in the western part of the state. With more oil companies sending employees to

the Bakken Formation area, a variety of other employment, in housing and retail, for example,

was necessary.

Baker’s comments highlighted residential construction that will affect nonresidential

construction. Because housing starts declined more than 70% from 2005, housing starts are near

or at bottom. Baker predicts that the housing starts will not rebound quickly as foreclosures

continue and many homeowners can’t afford their paying their bills as layoffs continue. Home

prices are falling in most areas, with home ownership affordability at an all-time-high level.
With continued layoffs, some commercial construction projects have been or will be cancelled.

The effect of ARRA funds, better known as the economic stimulus, remains to be seen for another

year.

         
 

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