First-Quarter '99: Continued, but smaller, gains ahead
By Daryl Delano -- Industrial Distribution, 5/1/1999
Nineteen ninety-eight turned out to be a much better year for the overall U.S. economy -- and for the construction market, specifically -- than we had any reason to expect. GDP grew by 3.9% during 1997. Who would have believed that it could grow by the same above-trend rate again in 1998 without touching off a debilitating period of higher inflation and construction-choking higher interest rates?That's what happened, though, thanks to a confluence of favorable factors -- plunging oil prices, lower commodity prices, negligible unemployment, and soaring consumer confidence and equity prices -- that aren't likely to be repeated in our (or our grandchildren's) lifetime. It was a bumpy ride, though. Russia defaulted on its (substantial) foreign debt in September, and emerging markets around the world were thrown for a loop. And this came on top of a series of economic and financial crises affecting the Asia/Pacific region that had already left U.S. investors vulnerable.
For the construction market, this meant a (thankfully brief) period of additional uncertainty regarding interest rates.
At the end of the day, however, the construction market came out of 1998 smelling, if not quite like roses, at least like daffodils. Spending for new construction work -- residential, nonresidential, and heavy sectors combined -- increased by almost as much (5.9%) in 1998 as in 1997 (6.5%). And construction jobs grew at almost twice the rate (4.9%) of overall U.S. employment (2.6%) during 1998. An extraordinary performance, under difficult circumstances, and one that's not likely to be repeated this year.
The market ended 1998 on a high note and began 1999 with even better numbers. But a modest slowdown in growth -- not to be confused with a downturn -- is just around the corner.
The economy is eventually going to slow and interest rates have been heading up for the better part of two months now. Consequently, growth in the construction market will also slow this year.
With residential construction spending (about 37% of the overall market) set to dip in 1999, and nonresidential construction spending (particularly the commercial sector) gains likely to ease, we expect total construction spending to grow by a much less robust 1% this year.
Growth should begin to accelerate again in the year 2000, however. And the nonbuilding construction sector -- led by solid gains in the highway and utilities sectors -- should increase spending at impressive rates both this year and next.
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