Drop in construction growth seen in 1998
By Staff -- Industrial Distribution, 3/1/1998
Newton, Mass. -- Analysts expect nonresidential construction spending to grow for the sixth consecutive year in 1998, but at a less robust pace than last year's 8.5 percent clip.Reed Elsevier Business Economics forecasts 3.3 percent growth to a total of $230 billion for 1998. Nonresidential construction activity includes industrial, commercial and institutional spending.
Construction on new industrial plants and facilities is expected to grow 3 percent following declines the past two years and only tepid growth overall since 1994. Business investment has focused on capital equipment instead -- by an annual compound increase of 10.3 percent from 1992-1997. Much of the investment has brought technological improvements that boosted manufacturing productivity, according to analysts such as Thomas Foy, a construction economist at FMI Corp. in Raleigh, N.C.
Spending on new plants slowed during the last four months of 1997 to $30.6 billion, $4.6 million below 1996 levels, says Kim Kennedy, an economist at Reed Elsevier.
"It may be an Asia thing. I wouldn't be too worried,'' she says. "I think it will probably bounce back from there in 1998.''
Commercial construction is expected to dip slightly, led by declines in the retail building sector. Reed Elsevier forecasts spending increases in other commercial areas such as office (4.2 percent) and hospitality construction (4.2 percent). Overall, commercial spending grew strongly by nearly 8 percent last year.
Drops in the retail sector, which slowed to 2.7 percent growth in 1997, reflect an overbuilt market in most areas of the country. Retail construction is also closely tied to housing starts, which remained flat last year and are expected to slow further this year. An overall sluggish performance of retailers during the past several years is also a factor.
Meanwhile, startups of new offices should increase as vacancy rates continue to decline nationwide. Spending on new hotels and motels will slow down from its hot pace of the past four years, but should still grow by 4 percent.
Finally, institutional construction spending should grow by nearly 7 percent, driven mainly by new schools. Spending on educational buildings rose by 15 percent last year and should gain another 14 percent this year. Hospitals and other healthcare building should rise again this year, although less than last year's 14 percent increase.
Nonresidential construction activity, which peaked in 1990, typically enjoys a temperate business cycle because of stability in institutional building.
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