Construction executives received a cautiously optimistic construction industry forecast for the remainder of 2002 and beyond at the 7th Annual CMD/CSI CEO Breakfast, Las Vegas, in late June. Construction economist Bill Toal, formerly of the Portland Cement Association (PCA), forecast a 1.6% drop in total construction for the year with an expected increase of 1.4% in 2003. PCA data provides a reliable forecast, as cement products are a good indicator of construction activity because of their widespread use in residential, commercial, industrial and public works construction.
Toal indicated that while some sectors remain weak, the economy is now showing signs of improvement. Some of the more apparent signs of recovery include an increase in industrial production and record low inflation and interest rates. Due to these low interest rates, consumer spending continues to be strong, and auto sales and housing starts are still robust. As a result, residential construction remains stronger than expected, though a small dip is expected before the end of the year.
While industrial production had slipped in the beginning of this year, it has recently shown signs of improvement. However, the corporate office market is still declining, as there is the impression that things may be worse than previously thought in the corporate sector due to recent financial scandals (Enron, WorldCom, etc.). Commercial and industrial real estate were previously overbuilt and that has contributed to the high office vacancy rate, which has increased from 7% last year to over 15% currently. While the job loss rate has declined, layoffs and downsizing continue to contribute to the imbalance between available office space and corporate need for that space.
Earlier forecast numbers for residential construction have now been revised up. Housing starts were predicted to drop below 1.5 million for the year from 1.6 million in 2001, but are now expected to finalize at 1.55 million starts for 2002. Industrial and commercial construction have dropped off significantly this year and Toal suggested that this was a “red flag” for this segment of the market, with a forecast drop of 10.8% by year’s end. However, the industrial and commercial sector is forecast to begin recovering with a 5% increase in 2003.
Airport and school construction will remain strong through the final two quarters of the year, as will public works. In particular, public works has and will continue to benefit from the U.S. Transportation Equity Act for the 21st Century (TEA21), which provides federal funding for transportation construction. This high-level funding, which has been in place since the Act was passed in 1998, will continue to trickle down through public works construction and help maintain that market segment’s strength.
Toal also presented a macro-economic forecast for the remainder of 2002 for the inflation-adjusted gross domestic product (GDP). He reported that while the GDP experienced a negative percentage change in the third quarter of 2001, the first quarter of 2002 delivered a 5.8% increase. He expects the final numbers for the second quarter GDP to report a 2.5% increase, with the third quarter rising to 3%, and then 4% in the fourth quarter. This data points to economic growth in the coming years.
For a more comprehensive forecast for the 2003 North American construction economy, CMD will be holding its annual North American Construction Forecast conference in Washington, D.C. on October 16, 2002. For more information, visit, www.nacf.com, or contact Heather Foster at 770-209-3461.