Volume 35, Number 1, January 2000

 

Good Times Ahead

Construction Executives Predict Continued Growth Into the New Millennium

by Helen Price

The overall forecast for construction and related-industries predict that the next few years will continue to be good ones, according to speakers at CMD Group?s fourth annual North American Construction Forecast, held recently at the National Press Club in Washington, DC. ?There are good days ahead for construction and related industries,? said Bill Toal, keynote speaker and chief economist for the Portland Cement Association.

Toal, who is a specialist in construction industry forecasting and modeling, presented the U.S. construction outlook at the conference. The annual event brings together analysts and economists to discuss conditions underlying the construction indsutry and predict their impact on building activity and opportunities.

Toal announced to conference attendees that total inflation-adjusted construction spending is expected to continue on the upswing, reaching new record levels this year. ?Gains of 3.5 percent are expected this year after a 4.7 percent increase last year. Next year, a fractional decline is forecast (-0.8 percent) because of the expected pull-back in residential construction,? Toal said. ?Thereafter, gains in the 2 percent range are projected. This is all positive for the construction and construction materials industries.?

The Economic Impact

Toal predicted that ?continued economic growth, albeit at a slightly slower pace than in 1998 and the first quarter of 1999, should lead to a steady construction picture.? He said that, while residential construction is expected to back off from today?s high levels, private non-residential and commercial construction is, at the worst, expected to flatten out over the next few years. ?The trump card is the expected gains in public works construction because of the passage of a new federal transportation bill.?

The U.S. economy is in its ninth year of expansion, said Toal. ?If this growth continues through the spring of next year (2000) it will be the longest economic expansion of this century moving into the next century.? He said there are few signs on the horizon that this ?economic miracle? is about to end.

Toal said gains in technology have helped boost the economy in ways that are not entirely understood. Capital spending on information processing equipment has risen from practically nothing in the early 70s to 5 percent of today?s gross domestic product.

Toal cautioned that continued economic expansion does not come without risks. ?The most significant is an upturn in inflation,? he said. While inflation rates have been amazingly stable, Toal asked how long can this last, with commodity and energy prices firming. The Federal Reserve?s Open Market Committee is likely to respond by raising interest rates, as it has already done. Short-term interest rates have already been raised twice and further increases are likely on the horizon. ?The best bet is to simply slow the economy into the low two percent range by next year,? said Toal, adding that no recession is expected ?as far as the eye can see.?

Today?s economic expansion is unique in that there are few imbalances in today?s economy, said Toal. Federal, state and local government budgets are in surplus, and supply and demand balance appears to have returned to commercial construction. Typically, at the end of an economic expansion, commercial construction becomes overbuilt, as it did in 1989, and the ensuing decline in construction is severe, he explained.

The Commercial Forecast

?In today?s environment, office vacancy rates have fallen from more than 20 percent to 9 percent. In many areas there are shortages of office space and rents are on the rise. No major retrenchment in commercial construction is, therefore, in store,? Toal predicted.

The cut-off of credit availability in the late 1980s shared responsibility with conditions in the ?real economy,? for the economic downturn and construction crash at the turn of the decade, said Toal. However, today, commercial banks? balance sheets are in much better shape while at the same time, most major corporations have rationalized their existence and pared down debt levels to the point that debt-to-equity levels are in the best shape in years, according to Toal. ?The days of the crisis in the savings and loan industry are now well behind us,? he added.

Residential and School Predictions

?Based on this economic scenario, the outlook for construction is mixed,? Toal said. Rising interest rates suggest that single-family residential construction will slow. ?Expect some weakness in the single-family market to develop over the next two years.?

However, there may be better days ahead for multi-family construction, which has been ?in the doldrums? for several years, according to Toal. ?Demographic trends are beginning to turn favorable for this area of residential construction.?

In general, some retrenchment in residential construction is expected next year, with total housing starts dropping to 1.475 million units from an expected 1.608 million this year. The mix of construction will increasingly change from single- to multi-family residential construction.

Toal pointed out that primary and secondary school construction and reconstruction has typically been one of the hottest areas of activity in recent years. However, some weakness has shown up recently. But, based on demographic projections, Toal predicts that the industry can ?expect gains in the 3 percent to 5 percent range over the next few years.?

Another growing category is triggered by the demand for institutional facilities, managed care residential and upscale multi-family residential construction. Toal says the aging of America is responsible for this anticipated growth. ?The 55 and over population is now rising and will continue to rise through the first decade of the next century,? he said.

Non-Residential Issues

Overall, private non-residential construction has rebounded nicely from its more than 40 percent drop in the early 90s, said Toal. Increases of nearly 5 percent or larger have occurred in each of the past three years. Fundamentals remain strong for office construction as vacancy rates remain low. Double-digit increases in office construction should occur again this year before slowing into the 3 percent range.

Tightness in the office and educational markets balance off some softness in the hotel and industrial construction markets. Private non-residential construction is, therefore, expected to show little change this year and next before recovering. ?Based on past construction cycles, this is not a bad outlook,? said Toal.

Two areas that may show some weakness are construction of manufacturing facilities and warehouses, and hotels. The declines in manufacturing activity and exports during the past year and a half have hurt industrial construction activity, said Toal. ?With the Asian Basin countries now showing signs of recovering, exports should rise,? he predicted.

Look for industrial construction to turn up next year and succeeding years. Hotel construction, after three years of double-digit increases, may have peaked. ?This is one area of construction that may be overbuilt,? Toal remarked. Declines are expected in both 2000 and 2001. Retail construction should slow with a slowing economy and consumer spending. ?Still, only a flattening out of construction of retail stores and malls is expected, but no significant decline,? he said.

The Shining Star

?The shining star in the construction picture over the past 20 years, and more recently, has been public works construction,? Toal said. Since the early 80s, after years of decline, public construction has risen steadily at the same time that both residential and commercial construction experienced several up and down cycles.

Toal cites highway construction as a major driver of the surge in public construction, along with a boom in construction of public buildings. The federal transportation bill passed in the early 80s called for increased funding for highways and bridge construction. New federal legislation was passed in the early 90s, with many states following their lead.

More recently, a new piece of federal legislation increased federal transportation aid by 44 percent over a six-year period. ?This assures that public construction, and particularly highway construction, will continue to lead growth for the near future,? Toal predicted. In addition, as public works construction rises as a share of total construction spending, it assures that construction will be a more stable element in economic activity than it has been in the past.

Risks?

?Of course, as always, there are risks to consider,? said Toal. ?Inflation could heat up more than expected, leading to a greater rise in interest rates than currently expected.? The downside of an inventory cycle could develop as we move into the new century, leading to greater economic weakness than forecast. ?And finally, nine of the 11 recessions that have occurred since the 1920s have occurred in the first year of a new presidential term. Guess what the year 2001 is? No way?I think?I hope,? he quipped.

 

Helen Price is special projects editor for USGlass magazine.

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