Newton, Mass.—As 2004 began, the construction industry was giving thanks for the ongoing success of the home building sector—yet did so while casting a wary eye on the possibility that low mortgage rates, which had fueled home building, would begin to rise.

In its "2003–2004 U.S. Market Construction Update," the FMI Corp. gives reasons for modest optimism in areas other than residential housing construction, suggesting that commercial and non-residential construction could improve if the economy continues its growth into the second half of 2004. FMI provides management consulting to the worldwide construction industry.

FMI also found that the overall construction industry is still experiencing softness in some sectors. The public building sector, for example, has been hurting, as state governments nationwide have cut back on their building budgets.

Randy Diggard, manager of the marketing information group at FMI, agreed that "it has been residential that has carried the day," while cautioning that the housing bubble may inevitably shrink, if not burst, should mortgage rates go up.

"Interest rates may drift a bit higher," he said, "and because we've attracted some people into the residential market sooner than they otherwise would have been, the residential side may slow down. Although, at this point in early '04, we haven't seen [a slowdown] yet. But most of us still think the residential side will cool off."

The carry-over effect of residential building was seen in the ongoing growth in home improvements, a sector of the construction industry that "has grown significantly in recent years, reaching a level of $123 billion in 2002…The segment has gained more than 35 percent over the past five years," the FMI report stated.

However, FMI projected that home improvements would slow down in 2004, because many homeowners took advantage of low mortgage rates in 2003.

FMI's projection of at least a modest improvement in commercial building in '04 is in line with the feedback that David Smith, executive vice president at Metabo in West Chester, Pa., has been getting. Metabo is a manufacturer that specializes in portable electric power tools.

"What we seem to be hearing from our distributors is more optimism, and more from the commercial construction side, as well," he said.

The commercial side, he added, is finally seeing some activity occur "as far as projects starting, or at least hearing they will be starting."

Smith knows of a customer that said he bid on more than 500 jobs in '03, "and 90 percent of them never happened," he said.

Recently, "some of that stuff that drew bids is coming to fruition," Smith added. "Nothing significant, but little windows of opportunity here and there, whereas before there were no windows at all."

Ron Tacey is director of purchasing at AH Harris, which distributes concrete-related products to the commercial construction trade. His Newington, Conn.-based branch had a "pretty good year," in 2003—once the snow melted.

"Here in the Northeast, we had unusually severe weather and a very wet spring," he said. "Once we got into May, though, business picked up and continued to be good for the rest of the year. But we never did make up for what we lost in the first four months of 2003."

Tacey has another concern he'll be watching in '04: steel prices.

"Steel prices have been rising dramatically," he said. "And even with the tariffs being removed, domestic steel prices continue to rise at an unprecedented rate. And that is going to have an effect on construction at some point."

Some thought that when President Bush removed the tariffs on foreign steel, "the price would stabilize, or maybe even drop," Tacey explained. "But it didn't happen. It's supply and demand at work. There's a big demand for [U.S.] steel in foreign markets, [so] a lot of that steel is going overseas."

Tacey sees 2004 in an optimistic light.

"It's an election year," he laughed. "And the administration will do everything it can to stimulate the economy. So we're pretty confident business will be good…."

Metabo's Smith agrees.

"If commercial construction turns a bit around," he said, "I see overall positive growth in the industry."