Forecast update: When will construction hit bottom?

By Katy Devlin, Glass Magazine
January 30, 2009
COMMERCIAL, RETAIL, FABRICATION : FORECASTS

During a Jan. 27 Webinar, two leading construction economists answered the question, “Have we hit bottom?” Jim Haughey, chief economist for Reed Construction Data, Norcross, Ga., forecasted the U.S. economy will hit bottom in late summer or early fall of 2009.

Total construction spending, which started slipping in 2006 with the fall of the housing market, will hit bottom at the end of 2009, with nonresidential starts bottoming out in fall 2009, and residential starts in summer 2009, Haughey said. According to Reed Construction Data’s U.S. Construction Spending Outlook, total spending, which fell 5.1 percent in 2008, will slip 3.7 percent in 2009 and rebound 5 percent in 2010. 

 “We are approaching the bottom. … Most of the damage is behind us, though much of the pain is still ahead of us,” Haughey said.

Ken Simonson, chief economist for the Associated General Contractors of America, Arlington, Va., shared similar predictions during the Webinar. Total spending fell 5 percent in 2008 and will fall between 3 percent to 9 percent in 2009, he said. Nonresidential construction saw 12 percent gains in 2008, but will slip between 1 percent and 7 percent in 2009.

Residential spending, which fell 27 percent in 2008, will stay fairly steady in 2009, sitting between negative 2 percent to 2 percent, Simonson said. Home sales will begin to see a steady upturn in the first half of 2009 as “more people can afford homes with the prices so low. While interest rates have been bumped up, they are still significantly lower than they have been,” he said. Selective markets will see increases in home building starts in the second half of 2009.  


Source: Reed Construction Data


Source: Reed Construction Data

While nonresidential building will face slower times in 2009, the fall will be nothing like the huge drop in housing starts during the last several years, Haughey said. According to Reed Construction Data, U.S. housing starts fell 12.6 percent in 2006, 26 percent in 2007 and 32.4 percent in 2008. Starts will fall another 15.2 percent in 2009 with a major 31.4 percent rebound in 2010.

“[For nonresidential construction], we’re taking the damage early, at the end of 2008 and early 2009, and it’s going to hold up better than housing did,” Haughey said. “There’s a lot of momentum with projects that are already underway and in public projects. … This is going to [keep nonresidential construction] reasonably steady, even though this market is crashing more quickly than any other parts of the market.”

Both Haughey and Simonson said the economic stimulus package going through Congress will affect building, but “will have little effect on slowing the recession,” Haughey said. “The stimulus has substantial upside potential, mostly for 2010, if the full plan is enacted. It will speed up recovery,” he said.

President Obama’s stimulus plan includes $134.5 billion for new construction funds in 2009 and 2010, including $77.1 billion for civil, $43.1 billion for nonresidential, $8.1 billion for multifamily and $6.2 billion for single family, Haughey said. He forecasted that between $12 billion and $15 billion will be spent in 2009.

The availability of credit also will continue to affect the industry in 2009 and beyond. The credit markets have been progressively thawing since August and September 2008, but borrowers still face, and will continue to face, hurdles, Haughey said. “Credit access is going to be a strain on the economy in the next few years, and will be very severe in the next five to six months.”

Simonson added that even with credit increasingly available, many owners and developers won’t be investing with the overall economy suffering. “The underlying economy has been deteriorating. Developers aren’t going to be putting up office buildings. They’re not going to be building hotels. On the public side, revenues are dropping so fast that states, required to balance budgets, are having to scale back on some projects.” 

One upside for construction companies during the downturn will be the plethora of skilled labor. “You won’t have trouble finding skilled employees,” Haughey said.

Visit Reed Construction Data and AGC of America to view the full Webinar.