Volume 44, Issue 3 - March 2009

Industry Outlook

Construction Experts Ask: Have We Hit Bottom Yet?

Have we hit bottom? That’s the question the Associated General Contractors (AGC) of America and Reed Construction Data asked during a webinar in January.

“Total construction spending is likely to hit bottom before the end of this year,” said Jim Haughey, Reed Construction Data chief economist. For the nonresidential sector specifically, starts are expected to reach a bottom this fall.

Haughey offered three landmarks to watch for to know when the economy has reached its bottom: 

• First is the consumer confidence index. “This has been a major contributor as to how quickly this recession has developed,” he says. He says this marker needs to rise to about 70 and stay there for several months, and that’s not likely to occur until “well into the year.”
• The second point is the inventory/sales ratio; he says this factor will have to decline for several months back down to around 1.3 before factories will recall workers, and that’s expected to occur in the summer.
• The third item is that we’ll “have to see some improvement in the credit market.”

Haughey also reminded listeners, “There’s still a lot of business out there … stretch your market concept a little bit.”Ken Simonson, chief economist for AGC, said that while single-family residential may see improvements, for multi-family construction, “I don’t see any improvement before 2010 at best.”

Haughey explained that the recession is deepest in those states where the housing collapse has been most severe. However, one part of the country—the Gulf Coast—was expanding. He pointed to Texas as a strong market. He noted, on the other hand, that recession has barely gotten started in Northeast, since “this part of the country always feels the slowdown late because of the industry here” and predicted that would be one of the last areas to see improving construction. When one questioner asked where to refocus construction efforts, Simonson said, “I would pick out very small spots, those around military bases that are getting realignment money.”

Haughey added, “College towns always hold up better,” supporting his comment that educational building would stay strong by further explaining that with students “once they’re there they’re there.”

However, Simonson said, “by and large this is a national slowdown.”

Simonson also addressed labor costs. He pointed out that the construction has seen large drops in employment in the last 12 months, yet average hourly earnings rose rapidly. “That’s because in part there were union contracts signed at the beginning of the year … that locked in rates,” he explained. He also noted that the construction work that has continued largely has used specialized workers who are likewise more highly paid.

Unemployment is expected to peak at 9 percent sometime next year, according to Haughey. “It’s going to be several more years of a somewhat sluggish economy,” Haughey said.

USG
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