Construction Market Outlook

Jim Haughey, director of economics for Reed Business Information -- Industrial Distribution, 3/19/2004

Construction spending has kept up with the overall economy in the last two years but will grow about 1 percent to 1.5 percent slower than GDP in 2004-05, even though construction spending growth will pick up 1 percent (0.5 percent after inflation, to be comparable to GDP). Cheap mortgages pulled some residential construction spending that normally would have occurred in 2004-05 into 2002-03. This front-loaded the construction market recovery, so the growth prospect is relatively weak compared to manufacturing.

Construction spending, including inflation, is expected to increase 4.8 percent this year and 5 percent next year after gaining only 2.3 percent in 2002 and 4 percent in 2003. Much stronger spending growth is likely in 2006; peak construction spending is typically very late in the business cycle. 

The 4.9% annual average growth rate expected in 2004-05 masks sales opportunities for distributors. This is because it averages the early 2004 period of negligible growth with the following period of very strong growth.  

Construction grows irregularly with alternating surges and pullbacks. Spending jumped more than 7 percent from May to December 2003 due to tax cuts and cheap mortgages.  Then spending dipped 0.3 percent in January, with little growth expected until the end of summer because the housing boom has ended and the economic recovery has not yet produced enough new space needs to spur commercial building or public works projects.  Beginning in the fall, spending will surge about 9 percent by the end of 2005 as contractors fill the orders for more commercial space and other facilities generated by a year of above-average economic growth.

The 2003 spending surge was entirely in new residential construction. But the 2004-05 surge will be entirely in commercial buildings and heavy earth-moving projects for roads, water, sewer and oil/gas lines, as well as facilities for transportation, energy, water treatment and communications. The only steady market is residential remodeling, which will grow slightly faster than the economy from 2002 through 2005.

Regionally, the biggest impacts from changing market trends will be in the rapid growth metropolitan areas in the South and West where construction is a much larger share of the local economy.

Contractors are very optimistic. A recent Manpower, Inc. survey found that they had the most aggressive hiring plans for this spring since 1978. These plans are probably a little too much, and about six months too soon. Contractors are expected to add 100,000 new construction jobs from December 2003 to December 2004, but most of them will come very late in the year.

Construction Spending, $B, seasonally adjusted annual rate

(source: Census Bureau  forecast: Reed Research Group / Industrial Distribution)