Volume 34, Number 2, February 1999

 

"It is the Best of Times"

Bright Future Lies Ahead for Construction Industry

Industry experts who gathered in October at the third annual North American Construction Forecast Conference in Washington, D.C., received a positive outlook for the state of the building industry. The conference attracted more than 200 design and construction professionals, manufacturers, economists, government agencies and association executives. The conference was sponsored by the CMD Group, provider of construction market data.

Bill Toal, chief economist for the Portland Cement Association, provided an overall forecast of the construction market for the upcoming year. He summed up the state of the industry by saying, "Right now, for the construction industry, this is the best of times."

Toal cited positive conditions in the U.S. economy, such as, economic expansion, low inflation and 25-year low unemployment rates as factors in the positive state of the industry. "Construction activity, hitting on all cylinders, is at record highs," said Toal. "Even if the economy should drop, there would be a low overall drop in construction."

Residential Construction

According to Toal, residential construction accounts for over 40 percent of construction spending. Single family construction dominates the residential market while home improvements account for 30 percent. Housing starts, while strong, remain below the levels of the 1970s and early 1980s. Toal says demographics do not favor single family construction. "This age group has declined since the early 1990s and will continue. "For us to continue at this rate isn’t sustainable," he said.

On the other hand, Toal said population trends are turning favorable for multifamily construction. According to census population figures, these numbers will start rising again. Sales of existing homes remain at record levels, sparked by low interest rates.

Nonresidential Construction

On the nonresidential side, Toal cited retail construction as the dominating factor in private nonresidential construction. Nonresidential construction has recently flattened out after several years of recovery and religious and educational construction lead the nonresidential construction upturn, he said. But while this segment leads the upswing, Toal noted the drop in office vacancy rates over the past three years. In many cities these rates are at five percent.

When addressing public works construction, Toal said this has been the primary area leading to new record levels of total construction activity. Most public works construction is undertaken by state and local governments. Fiscal conditions of these government units are strong. "One of the reasons public construction will stay strong is because of the state and local government surplus," he said.

But, no segment of the construction industry is stronger than schools and highways. "School and highway construction is the strongest area of overall construction today and will continue," said Toal. According to Toal, most school buildings were built before 1970 and need to be modernized. Also, the school age population is increasing leading to increased demand for primary and secondary schools.

While schools and highways are in desperate need of construction, Toal says the hotel industry is one segment of the nonresidential market where overloading has occurred.

Economic Forecast

According to Toal, economic activity will slow as the year progresses, but no recession is forecast. "Last year I was saying I thought the feds would raise interest rates. If there’s one major risk, it’s deflation," said Toal.

Toal added that the gross domestic product (GDP) should advance at its long-term advantage of 2.5 percent this year before slowing. "We don’t have a recession in our forecast, but significant slowing in economic growth."

Toal offered attendees his fearless economic forecast:

• Turmoil in Asian basic currency and financial markets keeps U.S. interest rates low.

• Declines in import prices keep inflation low despite tight labor markets.

• Deteriorating trade balance and slowing inventory investment will lead to economic slowing.

• GDP forecast to increase 2. 4 percent in 1998.

• GDP increases around 2.0 percent in both 1999 and 2000.

In addition, Toal offered domestic and global risks which may pose a future threat. "We talk about risks and you have to think about them, but it’s difficult to quantify them," he said. While no recession is forecast, he said monitoring domestic risks is especially important. "As never before, the U.S. economy is subject to events around the world."

Domestic Risks:

• Wage pressures and higher inflation.
• Labor shortages.
• Speculation financial "bubble".
• Fiscal/monetary policy errors.
• Consumer debt load.
• Year 2000 computer crash.

Global Risks:

• Asian financial crisis.
• European monetary union.
• Problems in Russia.
• Sadam and the Middle East.
• Year 2000 computer crash.

Toal’s Economic Forecast

Toal offered attendees his construction forecast for the coming year:

• Housing starts hold in mid 1.4 million unit range in 1998 before dropping.
• Nonresidential construction flat this year and next.
• Office and school construction remains strong.
• Industrial, hotel and retail construction will be in decline this year.
• Positive outlook for public works construction, particularly highways.
• Construction activity rebounds at the end of the decade as public works construction booms.
• Residential construction accounts for most of the weakness next year.
• Nonresidential flattens out but does not decline.
• Office construction continues to rebound as low vacancy rates exist.
• The passage of TEA-21 assures increases in highway construction.
• Any declines in nonresidential construction will be buffered by public works construction. Toal predicts a four percent increase this year and six percent next year.

Tara Taffera is the editor of USGlass magazine.


USG

Copyright 1999 Key Communications, Inc. All rights reserved. No reproduction of any type without expressed written permission.