Economist Talks About What's in Store for the Future of the Construction Market
May 4, 2010

Is the construction industry ready for a rebound? That was question posed to economists today during a market insights webcast organized by Reed Construction Data, the Associated General Contractors of America (AGC) and the American Institute of Architects. While there are definitely rough patches ahead, overall, economists had a positive perspective on the future.

"I'm delighted to have some good economic news, if not for non-residential construction," said Ken Simonson, chief economist for AGC. He said real GDP has grown for the third straight quarter by 3.2 percent.

"This would have been a much bigger figure except there were declines in private non-residential, residential and public construction spending," says Simonson. "I am concerned that those trends will continue for quite a while longer. It's not all bad news, though."

Simonson said there have been broad improvements in the overall economy outside of investment and structures.

"Yesterday the Bureau of Economic Analysis told us that personal income increased again in March by 3/10 of a percent and personal consumption expenditures increased by 6/10 a percent. These are important indicators for future construction demand, but right now non-residential is still seeing huge vacancy rates, and very low effective rents for developer financed categories. Public construction is burdened by the downturn that's continuing in state and local revenues, even though the Stimulus legislation has provided some help."

Looking at the Stimulus bill, Simonson estimated $135 billion in spending from the law. "That sounds like it should be enough to boost construction spending, but it has been rather slow, other than the highway portion," he said.

Some tax changes have also been helpful in boosting spending. "In November, for example, the homebuyer tax credit was extended through April. Another provision that was extended and may also be expanded further was the Build America Bonds. These enabled states to reduce their costs of borrowing and in some cases increase the amount of construction they have done," Simonson said.

Simonson posed the question: Has the Stimulus been enough to keep construction spending up? His answer: No.

"Total construction spending through February dropped 13 percent of seasonally adjusted annual rate. Of that, private non-res construction fell by 24 percent and public construction by 5 percent. In spite of the Stimulus coming through it shows how big a drag spending cuts have been," said Simonson.

On the other hand, he pointed out that private residential construction finally leveled off last spring.

"It's now up on a year over year basis for the first time in four years," said Simonson who explained that residential can be looked at in three parts.

"The new single family is on an upturn with ten straight months of increases in spending; even improvements to existing single family, which has bobbed up and down, are solidly in the plus territory; new multi-family investments are still tumbling at a 52 percent rate," said Simonson, who added, "The trend is strongly upward for single family and down for multi family."

Looking at non residential, this is mostly a "big negative." Combining public and private non residential, the total decline from February 2009 to 2010 was 16 percent.

In terms of construction employment, jobs have been lost almost everywhere as only North Dakota and Arkansas added jobs in the past year, and those were less than 1 percent-100 jobs in North Dakota and 300 in Arkansas. The rest of the country lost anywhere from 3 percent to 11 percent of its construction employment.

Looking ahead, Simonson said building construction will have another bad year. Non-residential spending will be about 0 to -5 percent; residential will be up 5 to 10 percent, though multi-family will stay down; and total construction spending is expected to be between -4 and +2 percent.

For 2011, though, Simonson expects construction spending will be positive for the first time in five years.

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