Dodge predicts moderate growth in construction

Higher interest rates will help to slow the construction industry's current nine-year expansion, however, unlike the later-stages of previous expansions, the current state of the construction economy is well balanced, hence moderate growth will continue in 2001.

That outlook was presented by Robert Murray, vice president of economic affairs for the Construction Information Group, a division of The McGraw-Hill Companies, according to a release from Business Wire. Murray delivered his annual forecast to industry leaders at F.W. Dodge's Outlook 2001 Executive Conference at the Mayflower Hotel in Washington, D.C.

"The construction industry witnessed remarkably steady growth during the 1992-99 period, reaching new highs in both current and constant dollar terms. The strength was present across the major industry sectors single family housing, public works, income properties, and institutional building as only manufacturing building stalled over the past few years. But no expansion goes on forever, and higher interest rates have begun to have some restraining impact this year, and that trend should continue into 2001," Murray said in the release.

For 2000, Murray estimates that total construction activity will rise 3 percent to $462 billion. While not as large as the 10 percent increase reported for 1999, it still marks the ninth straight year of expansion, at least in current dollar terms.

On a constant dollar basis, construction activity in 2000 will essentially match the previous year's robust amount.

"Although we will see a slower, more controlled growth pattern in 2001, I believe the immediate years ahead for the construction industry will continue to be healthy ones. We are not currently facing the imbalances that have been present in the latter stages of prior expansions. That is definitely a reason to be optimistic," Murray said.

According to Murray, at mid-2000, the economic backdrop seemed to be moving towards a "soft landing" following growth of about 5 percent during the first half of the year. From June 1999 through May 2000, the Federal Reserve tightened monetary policy six times, lifting the federal funds rate from 4.75 percent to 6.5 percent, and then held rates steady at its next three policy meetings.

Murray projects that this higher cost of financing, in combination with more restrictive bank lending standards, will lead to a more discernible dampening of business conditions towards the end of 2000 and into 2001. An economy moving at about 3.5 percent next year will not be providing the same push to single-family housing and several of the income property types.

At the same time, Murray said he believes there will still be a boost coming from supportive demographics (especially the expanding student population) and spending by the federal and state governments. The rate of growth for total construction activity will recede, but the level of activity should be able to remain close to what was reported during 2000, with a slightly different mix.

Murray commented on specific construction industry sectors:

Single-family housing will continue to settle back from its torrid 1998-99 pace, with 2 percent slippage in dollar volume arising from a 5 percent decline for dwelling units.

Slower income growth and a diminished "wealth effect" will lead to more restrained home buyer demand. At a projected 1.125 million units, single-family housing next year will still be about 10 percent above the annual average for the 1990s.

Public works construction will advance 6 percent, because of the ongoing strength for highway and bridge construction. Airport work also will be strong, boosted by funding from the new federal aviation bill.

Electric utility construction will essentially level off at the elevated volume achieved in 2000. About half the states have enacted deregulation plans, which in combination with capacity shortages should keep power plant construction close to this year's robust amount.

Income properties will post a slight 2 percent gain in dollar volume, although square footage will be down 1 percent. Multifamily housing should see greater activity, while tighter lending standards will exert a mild constraining effect on stores, hotels and offices.

Institutional building should rise 3 percent, because of further growth for school construction, while religious building and airport construction remain strong. In contrast, health care facilities will see more slippage for the clinic segment, while amusement-related projects (sports arenas, theaters and convention centers) will lose momentum in a more subdued business climate.

Manufacturing building is expected to rebound 9 percent, because of strengthening export markets, following the extended weakness of the 1998-2000 period.