McGraw-Hill Construction Forecast Calls for 11 Percent Increase in 2010

Oct. 23, 2009
Despite the sobering construction forecast numbers for 2009 and the slow climb back to prosperity that economists expect, the general mood at the McGraw-Hill 2010 Construction Forecast

Despite the sobering construction forecast numbers for 2009 and the slow climb back to prosperity that economists expect, the general mood at the McGraw-Hill 2010 Construction Forecast, held Oct. 15-16 in a packed ballroom in the Capital Hilton, Washington, D.C., was one of relief because conference speakers concurred that economic conditions had pretty much bottomed out.

The good news is that construction economists are forecasting double-digit increases in some segments of the construction market for 2010. The bad news is these increases come off some incredibly low levels of construction activity. Everyone knows about the train wreck in the residential market, but not as many industry observers may be aware of the record drops in some other areas, such as the construction of stores and shopping centers, which McGraw-Hill Construction expects to drop an additional five percent to a record-low 95 million square feet.

There’s also a potential crisis with commercial loans that go bad, said Robert Murray, vice president of economic affairs, McGraw-Hill Construction. “The scary thing is what’s happening with commercial real estate loans,” said Murray. “It’s possibly the second wave of the financial crisis, and it could affect smaller regional banks.”

When the presentations turned to the billions of dollars the American Recovery and Reinvestment Act (ARRA) of 2009 is slowly but surely injecting into the construction market (see article below), it was amusing to hear speaker after speaker talk about how government entities such as the General Services Administration (GSA), Department of Energy (DOE) and the Army Corps of Engineers that have been the first see the surge of stimulus funds haven’t had enough time to figure out how to spend it all.

It was also interesting to hear from Kermit Baker, chief economist, American Institute of Economists, Washington, D.C., that once the housing market soaks up all of current excess housing inventory, a new generation of first-time home buyers and a surge in immigration will keep homebuilders busy in the next decade, and will make the housing industry once again a key engine of growth in the U.S. economy. For now it’s going to be a slow crawl back to more prosperous economic times, said David Wyss chief economist, Standard & Poors, New York. In his presentation, “The Economic Outlook: Who’ll Stop the Rain,” Wyss said, “I think bad things have stopped happening, but good things haven’t quite started happening yet.”

Some other key takeaways from Wyss’ presentation:

1.) Because the stock market leads the overall economy by four-to-six months and we are experiencing a run-up in stock prices right now, real recovery should begin in 2Q 2010.

2.) The U.S. Gross Domestic Product (GDP) will be back in positive territory by 3Q 2009.

3.) The global recession was probably the most “synchronized recession” in world history, with global markets plunging in lock-step. Wyss puckishly called it an “exercise in ‘synchronized sinking.’” “China and India had the best performance because they are not as tied to global markets,” he said.

4.) The real estate market is methodically working its way through hundreds of thousands of units of excess supply. But any unexpected surge in foreclosed properties in the four states that had the biggest housing bubbles – Arizona, California Florida and Nevada -- will slow down the recovery.

The turbulent pricing patterns in the metals market reflected this uncertainty over the economy. Of all the metal markets he tracks, John Mothersole, principal, industry practices, Global Insight, Lexington, Mass., says copper is often the most difficult to forecast. This year is the copper market is even more puzzling because prices have run up to close to $3 per pound without any real surge in demand and because China appears to be in a massive restocking cycle. Overall, demand seems “at odds with the fundamentals,” he says. “We think there will be a modest correction in copper markets, and prices will bump over three dollars a pound before settling in around $2.50.”

For the key segments of the construction market, McGraw-Hill’s Murray offered the following 2010 construction forecasts: Total construction -- $466.2 billion (+11%); single-family housing -- $126.2 billion (+32%); multi-family housing -- $21.1 billion (+16%); commercial buildings -- $46.1 billion (-4%); institutional buildings -- $111.1 billion (+1%); manufactured buildings -- $9.4 billion (-14%); public works -- $136.3 billion (+14%); and electric utilities -- $16 billion (-3%).