Economists See Positive Indicators for Late 2008

Wed December 26, 2007 - National Edition
Pete Sigmund



The construction industry will continue to ride a very bumpy road in 2008, many economists believe, but they also see the year ending on a positive note, led by the beginning of a recovery in the badly slumping housing sector.

“We anticipate a modest rebound in both single and multi-family housing starts in the second half of 2008,” Bernard Markstein, staff vice president, forecasting and analysis, of the National Association of Home Builders (NAHB) in Washington, D.C., told Construction Equipment Guide (CEG). “This new construction will occur after sales of new and existing homes begin to improve in the second quarter.”

Markstein believes the first six months of the year will see a continued bad slump in housing starts. Despite the anticipated rebound in the second half, he expects only 800,000 single-family housing starts in 2008, a drop of almost 50 percent from the 1.47 million starts in 2006 and a 24 percent decline from 1.05 million starts in 2007.

“We make no bones about 2007 having been an unpleasant surprise,” he said. “We clearly underestimated how problems in the subprime market would seriously impact housing. The main argument for a modest rebound is that things are not getting any worse. It would appear that all the big problems in the mortgage market have been identified in the portfolios of financial institutions, which will continue to lend money. While we experience job growth, the economy and population continue to grow, and demand for housing increases because people need places to live.

“The institutions adopted tighter lending standards, such as larger down payments and higher credit scores, because of the subprime crisis, but it appears at this point that they are not tightening any further.”

Multi-Family

Housing Starts Dip

Construction of multi-family housing also has dipped, but not with the same overbuilding as the single-family sector, Markstein said, adding that NAHB sees a further dip in 2008.

“Multi-family housing starts have been pretty steady for the last decade,” he said. “We estimate they will fall from 335,000 starts in 2006 to roughly 309,000 starts in 2007 and 285,000 in 2008.”

“There has been too much condo-building and not enough rental,” Markstein said, “too much for the high end and not enough for the low end. Areas like Miami, Fla.; Las Vegas; and Washington, D.C., have a surplus of condos. It will take a while to work this off, though it’s not as bad as the single family market.”

McGraw-Hill Construction said, in its Construction Outlook 2008, that, “The sea change that occurred in single family housing last year has now hit the multi-family housing market.”

Weathering the Storm

The turmoil in housing, and in its financing, has increased fears of a recession. Many economists believe, however, that the construction industry, and the U.S. economy, will weather the storm in the coming year.

“Hundreds of other parts of the economy are doing well,” said William Buechner, vice president, economics and research, of the American Road and Transportation Builders Association (ARTBA) in Washington, D.C. “It’s widely accepted that the decline in home building can be absorbed without a recession.”

Buechner does not, however, downplay the severity of the housing reversal.

“Single-family housing is really the 600-pound gorilla in the construction market,” Buechner added. “home building is by far the largest construction market. A 20 percent to 30 percent drop in starts means we’re talking about a $200 billion drop in work.”

Ken Simonson, chief economist, Associated General Contractors of America (AGC) in Washington, told CEG: “In 2007, every area of nonresidential construction except the religious sector has been up, many by double-digit rates. I don’t think the economy will go into recession. I think gross domestic product will grow between 2 percent and 3 percent in 2008. I characterize that as moderate growth.”

Simonson is not completely sanguine about the outlook for construction in 2008, however.

“It’s a very mixed picture,” he said. “I do see some segments of nonresidential construction looking very strong, but the combination of the housing meltdown, financial turmoil and the slower economy will drag down some parts of this market. Sectors that I expect to show strength include hospitals, higher education, energy/power and communications. Sectors that I think will have a big slowdown include retail, offices, lodging and highways.”

Modest Growth Seen in Highway Construction

Many believe that construction of highways and bridges will continue to be a strong, stable, sector.

In ARTBA’s annual economic forecast, Buechner said: “The value of construction work performed on highway and bridge projects will grow to just under $78 billion in 2008, representing a 3 percent to 4 percent increase over the estimated $75.5 billion during 2007. Equally important, recent signs that rapid inflation in the cost of highway construction materials is easing may allow the projected federal, state and local highway investment to support more projects in 2008.”

Buechner also pointed out that Fiscal 2007 saw a $3.4 billion increase in the federal highway investment.

“As these funds move into the pipeline,” he said, “the biggest impact will occur in the 2008 construction season because of the time needed to design and start projects. This increase, plus other federal highway funds already in the pipeline, will support almost $30 billion of highway and bridge construction work in 2008, up from just under $27 billion in 2007.”

Another factor supporting modest growth in 2008, Buechner said, is the positive effect of the at least 3- to 4-percent increase in the value of new contracts awarded for highway and bridge projects in 2007.

The transportation appropriations bill for Fiscal 2008, which Congress passed Dec. 19 as part of its omnibus appropriations bill, should be another shot in the arm, since it includes an increase of at least $1 billion in federal funding. President Bush is to sign the bill into law. Historically, federal funds finance approximately 40 to 45 percent of highway capital investments, including construction.

Highway work, though encouraging, will not be a big offset to the housing decline, Buechner said “although it will be helpful, and hopefully will provide some jobs for laid-off workers.”

AGC’s Simonson is less hopeful, predicting a slowdown in highway construction.

“A lot of people assumed that the bridge collapse in Minnesota earlier this year would mean that more money would move into highways and bridges,” he said. “So far, however, neither Congress nor the states have increased taxes, which go into the Highway Trust Fund (HTF). Gas tax receipts have been coming in more slowly because high gas prices cause motorists to buy less gas, while sluggish growth of truck traffic has led to lower-than-projected receipts of diesel and truck excise taxes.”

There also is concern about the increasing cost of materials used in highway construction, and how this makes highway work more expensive, taking a larger amount from federal appropriations.

“The cost of highway materials has risen even faster than other costs,” Simonson told CEG. “Asphalt, concrete, steel and diesel fuel have all had major increases during the past four years. As a result, the producer price index for highway costs has risen 44 percent from December 2003 to October 2007.”

ARTBA’s Buechner said the costs increased less in 2007 than in previous years: only 5 percent, which he said has been “impacted to a large degree by the downturn in housing construction.” He said ARTBA expects this decrease in costs to continue in 2008.

Support for Increase in Gas Tax

Look for continued proposals by construction industry groups for an increase in the federal tax on motor fuels.

Christian A. Klein, vice president of government affairs and Washington, D.C., counsel of the Associated Equipment Distributors (AED), said in its outlook for 2008: “With projections of a $1 trillion highway investment gap over the next decade and a $40-billion deficit in the HTF by 2015, the federal highway program is facing a crisis unlike any before. We’re ringing alarm bells on the Hill to get Congress focused on the road program well before the current highway law expires in 2009. We think that a gas tax is the most fiscally-responsible way of solving the HTF shortfall since it gets people who use the roads to pay for their improvement.”

Commenting on the HTF shortfall, AGC’s Simonson said: “We would like to see a commission that would recommend funding, which Congress could accept or reject. This would remove highway funding from political statements.”

Equipment Manufacturers

Forecast Modest Growth

The Association of Equipment Manufacturers (AEM) in Milwaukee, Wis., predicts that demand for construction equipment in 2008 will grow by 8 percent in worldwide markets, by 2.8 percent in the United States and by 2.9 percent in Canada.

AEM’s annual outlook survey of members also sees a 1.9 percent decline in demand in the United States in 2007, flat demand in Canada at minus 0.1 percent, and a 9.9 percent increase in worldwide business.

”Overall, we’ve seen a slowdown in the past year or so, but it comes after some very good years for the equipment manufacturing industry,” AEM President Dennis Slater said in the outlook, adding, “The residential housing slump in the United States has sent ripples across the entire economy, not only the construction industry. However, growth in nonresidential construction continues to offset losses in the housing market.”

The weak dollar is helping exports of all types of equipment since the currencies of most foreign countries are stronger and can purchase more. AEM’s survey indicates that dealers expect large increases in sales outside the United States in 2008, including a 15.7 percent increase for lifting equipment and a 12.4 percent increase for earthmoving equipment.

’Guarded Optimism’

The economy faces uncertainty and a possibly turbulent year.

“Economic signals are mixed, but there is guarded optimism that our economy will remain resilient and not descend into recession,” said AED’s Slater.

Adversely affecting construction, some 800,000 homeowners entered foreclosure from mid-2007 to December, putting more houses on the market. As more mortgages, extended to borrowers with sketchy credit in the subprime market, adjust to higher rates, there could be as many as 3.5 million loan defaults from 2008 through mid-2010, according to some estimates.

The Commerce Dept. reported that the median sales price of a new home fell 13 percent in October compared with October 2006 — to $217,800. This was the largest year-to-year decline since September 1970. The sharpest declines were in Michigan, California, Nevada, Massachusetts, Rhode Island and Florida.

Confronting signs of both possible inflation and possible recession, the Federal Reserve on Dec. 11 lowered interest rates for the third time in 2007 – this time by one quarter point, dropping the benchmark federal funds rate, which banks charge one another for overnight loans, to 4.25 percent.

The Bush Administration now predicts that gross domestic product (GDP) will grow 2.7 percent in 2008, rather than the 3.1 percent previously predicted.

McGraw-Hill Construction says nonresidential building, including offices, stores, hotels and schools, has remained strong in 2007. Its 2008 outlook adds, however: “Total construction in 2007 is being pulled down by the residential sector, and it’s estimated that total construction in the current year will drop 8 percent to $627 billion. This is the first decline for total construction starts since 1991 (down 6 percent) and its largest decline since 1990 (down 9 percent).”

Busy Year Ahead ’On The Hill’

It will be a challenging year on many fronts. Commenting on efforts supporting the industry on Capitol Hill, AED’s Klein said, “Our work will continue and intensify to repeal the new 3 percent withholding tax on government contractors, which is scheduled to begin in 2011. This withholding amounts to a no-interest loan to the federal government, impacts profit margins and hurts cash flow, especially of small companies.

“We’ll also keep pushing in 2008 to reauthorize and substantially increase funding for the Clean Water State Revolving Fund, which finances sewer construction. Another priority is preventing the elimination of the LIFO (Last In, First Out) accounting method that more than 40 percent of AED members use to value parts inventories.”

As the new year begins, you might heed the advice of several construction industry organizations: “Fasten Your Seat Belts.” CEG