FMI Construction Outlook Projects End to Recession

If the U.S. economy has been in a deeper and lengthier recession than most Americans realize, then perhaps the timing of the recovery will be sooner than many suspect. The possibility of a shortened recession is born out by certain “leading” economic indicators that usually become favorable before an economy turns upward out of recession. In the fourth quarter, the stock, bond, and commodities futures markets rallied, indicating that the markets feel increasingly confident regarding business conditions in 2002.

In a recession, sectors of the economy often behave like inventory in the “FIFO” accounting method — “First Sector In, First Sector Out.” Just as manufacturing is likely to emerge as a leader in the recovery because it led into the recession, nonresidential construction will likely pick up later, in 2003.

Single-family

The traditional determinants of housing demand are still in good shape, but they have recently shown signs of weakening.

Residential building permit data have been trending downward since the second quarter of 2001. Even though sales are still strong considering the economy, the trend of housing permit data is more instructive than value-put-in-place data for determining residential construction in the first quarter of 2002 because incredibly favorable weather conditions in the Northeast and Midwest may have boosted construction statistics this fall.

Multi-family

After a surprisingly sound year in 2001, FMI forecasts that multifamily residential construction will slow significantly in 2002 before rebounding in 2003. Due to strong rental rates and low vacancies, the multifamily market's demand fundamentals remain sound.

Education

FMI's optimistic 2002 forecasts for education construction spending had to be tamed by the new realities of lower state and local tax revenues and resulting tough budget choices in the coming year.

However, according to the American School & University Official Education Construction Report, spending on new schools, additions, and renovations will continue to increase to record levels in the long term.

Office

Investment in new office construction has boomed in the past five years, but it now appears to be in the midst of a dramatic slowdown. Unfortunately, during 2002 even flat growth was unsustainable, as office vacancy rates climb and battered companies in hard-hit sectors like IT, telecommunications, and financial services put millions of square feet of sublet office space back onto the market. According to CB Richard Ellis, office space vacancy rates have risen steeply over the past year, to levels not seen since the mid-1990s.

Stores

New store construction in 2002 will likely be spared negative growth because there hasn't been the overinvestment boom that has occurred in some other nonresidential sectors. If the U.S. economy bottoms out in the first quarter of 2002, retail spending will likely be one of the sectors to lead the charge out. In turn, retail sales could grow demand for new stores in 2003 or even in late 2002.

Industrial

FMI expects that needed capital expenditures will translate into a strong structural investment recovery in 2003. It appears that manufacturers will be in a much better position to operate profitably in 2002 because most production costs will be at favorable levels for materials, expenses, and labor inputs. Structural investment usually follows increased profitability. However, low current operating-capacity rates will limit the amount of new industrial space needed.

Utilities

In the past five years, the energy and telecommunications sectors experienced a classic overinvestment boom during which there was a rush to take advantage of high-payoff, low-risk capital investment opportunities. As growth in these sectors slowed and earnings began to disappoint, investment funds fled from these sectors, resulting in the end of the utility construction boom. Between 350,000 and 400,000 megawatts of new power plant construction capacity is in the planning stages, according to Engineering News-Record. According to the Department of Energy, more than 1,250 new generation facilities must be built by 2020 to meet projected demand.