Forecast: Indicators Point to 2009 Recovery

Fri November 21, 2008 - Northeast Edition
Pete Sigmund




Leading economists say the strength of the U.S. and world economy in 2009 depends on the U.S. construction industry, especially the recovery of the single-family housing market and greatly increased multibillion-dollar investment in the nation’s infrastructure.

A nationally recognized economist for the housing industry told Construction Equipment Guide (CEG) that the housing recovery, which is a critical leading indicator for the recovery of the entire economy, will begin about the middle of 2009.

“We think that single-family housing starts will bottom about late spring or early summer of 2009, helping pull the economy out of recession as demand and sales pick up,” Bernard Markstein, director of forecasting of the National Association of Home Builders (NAHB) in Washington, D.C., told CEG.

Markstein’s prediction came as the construction industry remained a fulcrum for the nation’s future recovery from recession. A mammoth highway and transit measure — the largest in U.S. history — may be enacted. The government is modifying Fannie Mae and Freddie Mac loans to help homeowners avoid foreclosure, and may take further steps in the year ahead, using some of the $700 billion Troubled Asset financial bailout money.

Congress will consider a new infrastructure stimulus proposal that could allow transportation projects valued at $15 billion to $20 billion to be put out to bid within 30 days of passage.

Also very important — the incoming Obama Administration has pledged to make rebuilding the nation’s infrastructure one of the top items on its agenda.

Housing Recovery to

“Open the Pipeline”

Markstein expects 633,000 total single family starts in 2008, compared with 1.05 million in 2007 and 1,464,000 in 2006. At the mid-year bottom in 2009, he said only about 500,000 single family homes will be under way but expected the total to increase to 600,000 homes by the end of 2009.

“As the housing recovery proceeds, we look for 740,000 starts for 2010,” he said. “This increase would be the opening of the pipeline for construction. It would be a leading indicator for the economy because housing often helps pull our economy out of recession.”

Multifamily housing starts won’t fare as well, dropping 21 percent from 303,000 starts in 2008 and 309,000 starts in 2007 to 240,000 starts in 2009, Markstein said.

The residential housing market and associated services accounted for approximately 15 percent of gross domestic product (GDP) in 2007.

The downturn in single-family housing starts has hit all regions of the United States. McGraw-Hill Construction estimates in its 2009 Construction Outlook that total starts will be down 38 percent in 2009, with the largest declines being in the West ( down 47 percent) and South Atlantic (down 41 percent), followed by the Midwest (down 36 percent), South Central (down 31 percent), and Northeast (down 27 percent).

“For 2009, all five regions are expected to see weaker activity, with much smaller declines than were registered during 2007 and 2008,” the Outlook said.

Home Sales to Improve

“We also expect sales of new single-family homes to bottom in the first quarter of 2009 and then begin improving in the second quarter,” Markstein said. “That’s also a positive leading indicator. When demand turns up, that will power residential activity. Sales of existing homes, meanwhile, have held up reasonably well. However, a lot of these are foreclosure sales.”

An estimated one million properties were classed as foreclosed in 2008 and some estimates say five million more foreclosures will occur by 2010.

Ken Simonson, chief economist of the Associated General Contractors of America (AGC) in Washington, D.C., said, “I think single-home sales are close to the bottom and will increase in the first half of 2009 to the point where builders will be ready to pick up their tools in the second half.”

Loosening Credit for Construction

Economists said the industry’s slow, painful, recovery from the “financial meltdown” will be aided by increasing willingness of banks to lend money to contractors in good standing.

It has taken time because the meltdown has been the worst since the Great Depression of 1929.

“People facing foreclosure generally fall into one of three categories,” Markstein said. “They were overly optimistic — hoping their income would rise enough to meet their mortgage-payment obligations; ill-informed as they were sold a bill of goods; or involved in fraud. Now we’re all paying the piper. We haven’t seen this since 1929. We’re still recovering from a massive failure of capital instead of intelligent flow of capital. We kept thinking the darkness was past and the dawn was coming, but then it got darker.

“In this bleak environment, builders have experienced great difficulty obtaining operating capital through short-term loans to pay off suppliers. This across-the-board tightening of credit has held back recovery. We expect this situation to loosen in 2009 and that banks will begin to again lend money to construction firms.”

Forestalling Foreclosures

Government actions to help prevent foreclosures are another positive. The emergency Hope Now Alliance, established in early October, encourages banks to renegotiate mortgages, reducing mortgages loans to 90 percent of the home’s current assessed value.

“If a bank is willing to take a major haircut and renegotiate a loan, a foreclosure can be avoided,” Markstein said. “We’ve seen the rate of foreclosures beginning to ease up.”

Other steps to help stabilize the market include a tax credit of up to $7,500 for first-time home buyers. The Bush Administration has begun a new program modifying Fannie Mae and Freddie Mac loans for homeowners owing more than 90 percent of the home’s value, extending repayment time to 40 years and lowering interest rates, in order to prevent foreclosures.

Though many are not in actual foreclosure, nearly one in six homeowners — 12 million households — owe more than their home is worth. Average home prices are 20 percent off their peaks.

Robert A. Murray, vice president of economic affairs of McGraw-Hill Construction in New York, N.Y., said he doesn’t expect to see the decline in home prices to come to an end “until 2009 at the earliest.”

New Transportation

Bill Will Spur Activity

The new Congress next year must enact a new six-year multimodal transportation bill authorizing funds for highways, bridges and transit from 2010 through 2015. Funding proposals are almost staggering, as befits the escalating infrastructure needs.

“We are pointing out to the new administration and Congress that America’s transportation system needs $545 billion over the [next] six years,” Tony Dorsey, media relations manager of the American Association of State Highway and Transportation Officials (AASHTO) in Washington, D.C., told CEG. “This includes $345 billion for highways and bridges, $93 billion for transit, $43 billion from sources outside the Highway Trust Fund for freight improvements and $35 billion dedicated funding for inter-city passenger rail.”

AASHTO’s recommendation dwarfs the SAFETEA-LU transportation bill, enacted in 2005, which provided more than $286 billion. SAFETEA-LU expires Sept. 30, 2009, the end of the fiscal year.

The Transportation Appropriations Bill for 2008 included $41.2 billion for the federal-aid highway program. Under a continuing resolution signed by President Bush on Sept. 30, spending will remain at about this level for most of the first six months of Fiscal 2009. A proposal for a second economic stimulus program would provide an additional $4.7 billion for highways.

Highway Trust Fund

Faces Funding Crisis

During the transportation reauthorization process next year, Congress also will consider proposals for new ways of funding the Highway Trust Fund (HTF). The fund ran out of money during 2008 because motorists drove less, resulting in less gasoline tax revenues, which supply 90 percent of HTF funding.

As a result, Congress passed, and the President signed, legislation approving a transfer of $8 billion to the trust fund from the general fund.

Construction organizations stress the urgency of putting more money into the fund because incoming revenue can’t support current federal highway and public transportation investment beyond Sept. 30, 2009. AASHTO’s Dorsey said the current HTF provides approximately $40 billion a year while “the need is somewhere in the neighborhood of $70 billion a year.”

“Without increasing the revenue stream to the Highway Trust Fund after Fiscal Year 2009, we are facing a disastrous 45 percent year-on-year cut in federal highway program funding in Fiscal 2010 that would threaten as many as 700,000 American jobs,” said William Buechner, vice president of economics and research of the American Road & Transportation Builders Association (ARTBA) in Washington, D.C. Buechner said the unemployment rate in the construction industry at the end of September was 9.9 percent, more than four percentage points higher than the 6.5 percent rate for the economy as a whole.

Unemployment rose 1.3 million from August through October, to more than 10 million people throughout the United States.

The 18.4-cents-per-gallon fuel tax has been unchanged since 1993. Construction industry groups have usually supported raising this tax.

Highway Projects

Remain at High Level

AGC’s Simonson said he expects highway spending (value put in place on projects under way) to total approximately $79 billion for 2008, an increase of 4 percent or 5 percent over 2007, and then complete 2009 at about the same level.

“Highways are one of the slower growth categories,” he said.

McGraw-Hill’s Outlook said highway and bridge construction is expected to decline 4 percent in 2009, to $50 billion, the lowest level in four years, after declining 3 percent in 2008 to $51.9 billion. It said leading states in terms of dollar volume of construction are California, Illinois, Pennsylvania and Louisiana.

Typical major projects across the United States:

• Massachusetts is in the first year of an eight-year $3-billion accelerated bridge reconstruction plan that will reduce the number of structurally deficient bridges by 15 percent; it also plans to spend $540 million in 2009 on roads and bridges.

• Wisconsin begins work in 2009 on its $1.9-billion reconstruction of the I-94 corridor from the Illinois state line to Milwaukee; the project will run through 2016.

• The California Transportation Commission has allocated $191 million in new transportation funding from the Proposition 1B transportation bond. Projects include a new high occupancy vehicle lane, new interchange and repaving on Interstate 580 in the Bay Area community of Livermore.

• A public-private partnership will break ground in January on a 40-mi. stretch of State Highway 130 from southeast of Austin, Texas, to Seguin, Texas. This toll road from Austin to San Antonio, a $1.3-million investment, is to be completed by 2012.

• Georgia will complete its $83.4-million I-75/I-475 interchange reconstruction, including four bridges, in the fall of 2009. The work began in 2006.

New Administration

Supports Infrastructure Work

“We’re optimistic because we have a new administration which has spoken time and time again on the importance of investing in infrastructure,” Dorsey said. “President-elect Obama has expressed willingness to put transportation high on its agenda.”

The Obama presidential campaign produced a three-page position paper on strengthening the transportation infrastructure, calling this “a top priority.” The president-elect also has said that his top priority was to help Congress pass a new economic-stimulus program.

Democrats hold a majority in both the House and Senate, which would help Obama’s programs.

In addition, voters in 17 states approved more than $71 billion in ballot initiatives related to transportation funding.

Further Infrastructure Spending Urged

Construction groups are urging immediate action to increase infrastructure spending as part of a second economic stimulus bill in 2008 or 2009. (The industry says every billion dollars spent on highways creates more than 42,000 jobs.) As part of this, a new special infrastructure investment program is being proposed by Buechner of ARTBA and 12 other scholars. They declare in a letter to the Federal Reserve chairman and the secretary of commerce: “We project that there are $15 billion to $20 billion worth of transportation projects that could be put out to bid in the next 30 days, leading to contractors on site in 60 to 90 days, and generating a considerable flow of money back into the economy. Thousands of transportation construction projects appropriate for a stimulus program are ready to go.”

Besides targeting work like resurfacing highways and addressing the “enormous” backlog of needed bridge repairs, the group asserted that “state transportation departments have identified more than 3,000 projects totaling approximately $18 billion that could be under construction within 60 to 90 days after enactment of economic recovery legislation.”

They pointed out that “during the 1982 recession, President Reagan increased the federal gas tax by five cents per gallon and expanded federal highway investment more than 50 percent to provide an economic stimulus. That action helped boost employment in the construction industry between 1982 and 1985 by almost 700,000 jobs.”

The proposal includes real innovations, including 100 percent federal financing, with no required state match. States would be required to let projects before a set time or lose the funding.

Slump in

Non-residential Construction May Continue

AGC’s Simonson predicted that “non-residential construction, including public works as well as buildings, will drop anywhere from 3 percent to 9 percent in 2009 after increasing between 6 percent and 10 percent in 2008.”

“Non-residential construction is on the verge of a potentially long slide,” Simonson said. “Contractors have been reporting that developers put lots of projects on hold because of the credit freeze and weakening demand for stores, offices and other facilities. Meanwhile, states had to postpone construction bond issues or defer budgeted projects in order to meet balanced-budget mandates.”

Simonson also said a survey of corporate economists indicated that “companies on balance plan to trim spending on structures in the next 12 months.”

Said McGraw-Hill’s Robert Murray: “The lending environment for commercial projects will probably grow even more difficult in the near term, before some credit easing begins to take hold, perhaps in the latter half of 2009. This means that the downturn in construction starts shown by commercial building in 2008, particularly for stores and warehouses, will grow more widespread in 2009, dampening offices and hotels as well.”

Murray added, however, that, if the government’s steps to stabilize the economy are successful, “a rebound in commercial construction could occur earlier than expected, perhaps as soon as 2010 or 2011.”

Murray expected public works spending to fall 5 percent in 2009 “due to funding constraints at both the federal and state levels of government.” CEG