The U.S. construction market is entering a recession from which it will not recover until 2010. That seems to be the consensus among prominent national construction economists.
FMI has revised down its outlook for 2009 and expects nonresidential construction "to falter late in 2008 and into 2009." According to Heather Jones, construction economist for FMI's Research Services, total construction spending will fall four percent in 2008 and one percent in 2009. "The decline in 2009 will be driven by a decrease in nonresidential construction for the first time since 2003," she said.
Kermit Baker, chief economist for the American Institute of Architects (AIA), predicts a "dramatic drop" in nonresidential construction activity in 2009, especially in the office and retail sectors. The consensus forecast developed by the AIA foresees a 1.9 percent drop in inflation adjusted construction activity this year followed by a 6.7 percent drop in 2009.
"We've seen a dramatic contraction in design activity in recent months," Baker said. "Right now things are especially hard in the West and in the commercial and multifamily residential sectors. This weakness in design activity can be expected to produce a contraction in these construction sectors later this year and into 2009," he added.
"The one bit of good news is that this contraction in activity is likely to be considerably milder than the construction recessions of the early 1990's and earlier this decade," he said.
Baker cautioned that inflation could make the contraction worse than predicted. "The cost of construction materials has increased more than twice that of consumer products and services - up 37 percent versus 18 percent since 2004," he said, and that could hold back demand for new buildings.
"Surging prices for diesel fuel, asphalt, steel and other materials are clobbering construction budgets," said Ken Simonson, chief economist for The Associated General Contractors of America (AGC).
The PPI for inputs to construction industries--materials used in all types of construction plus items consumed by contractors, such as diesel fuel--surged 10.4 percent over the past 12 months. The index for highway and street construction leaped 18.9 percent.
"Bad as those figures sound, the increases in asphalt and steel costs have been even worse since these prices were collected in mid-June," Simonson said. "In the first two weeks of July, asphalt prices have jumped by 40 percent in several parts of the country. Prices for rebar--steel used to reinforce concrete in highways, bridges and buildings--soared $200 per ton."
In the futures markets, aluminum has been setting records, while natural gas has doubled in price from a year ago. That has triggered jumps in the cost of construction plastics--such as polyvinyl chloride pipe, insulation and flooring--that use natural gas as a feedstock.
Associated Builders and Contractors (ABC) noted that job losses already are mounting in construction, an indication that activity has already started to slow.
According to Gerry Fritz, a spokesman for the ABC, the nonresidential construction sector lost 5,600 jobs in June; 29,100 jobs over the last six months, and 43,900 jobs since June 2007. Total construction employment, he said, is down 452,000 since June 2007, a decline of nearly six percent.
With developers faced with rising construction costs "the industry can expect far fewer nonresidential construction starts in the year ahead," he said The ABC, he added, "anticipates continued nonresidential construction job losses in the remaining months of 2008 and into 2009."
Ed Sullivan, chief economist of the Portland Cement Association (PCA), said construction already is in recession and he expects it will not rebound until 2010 as the economy "is being dragged down by high energy costs and weak employment fundamentals." Focusing on the home building industry, he predicted housing starts will fall 36 percent in 2008 compared to 2007, for a third straight year of declines. By then it should be near bottom and housing starts probably will fall only one more percent in 2009, he said.
The number of single-family home starts in June was at its lowest monthly level in 17 years, 64.5 percent below the peak of the building boom in January of 2006, according to the U.S. Department of Commerce. Home builders do not expect it to get any better any time soon.
"Builders are reporting that traffic of prospective buyers has fallen off substantially in recent months," said National Association of Home Builders (NAHB) Chief Economist David Seiders. "Given the systematic deterioration of job markets, rising energy costs and sinking home values aggravated by the rising tide of foreclosures, many prospective buyers have simply returned to the sidelines until conditions improve," he said. Builder confidence levels and sales outlooks in June hit their lowest marks ever in the Wells Fargo/NAHB Housing Market Index.
Construction economists aren't the only ones predicting recession, according to Kevin Kliesen, an economist at the Federal Reserve Bank of St. Louis. Writing in the July issue of The Regional Economist, he noted that, "Escalating oil price and commodity prices, a sharp contraction in the housing market, and financial market turbulence have increased the odds of recession this year, according to most forecasters."
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