Construction activity is expected to remain strong as the U.S. economy enters a new stage of business expansion, but new residential spending is expec-ted to decrease slightly, according to Reed Construction Data. Higher mortgage rates, as well as escalating construction costs, have disqualified some prospective buyers for new homes, resulting in the slight downturn.

This recent construction data comes from RCD's August Construction Forecast Monthly, based on May figures.

Remodeling spending continues to expand at an average to average-plus pace. Total construction spending increased 0.3 percent in May, but after adjusting for the rapid materials inflation, this was a small decline in real (constant dollar) activity, according to RCD.

Residential construction spending will slip lower before non-residential and other sectors recover enough to fully offset the decline. The 7 percent gain forecast for 2004 comes entirely from the spending surge in late 2003 and early 2004, mostly for single-family homes.

During 2005, spending growth will begin at a 4 percent annual pace and accelerate to 6 percent by year's end. The expansion will continue into 2006.

The May housing report showed multi-family starts at their highest level in a year, but also showed multi-family permits at the lowest point in the last year. The multi-family market remains overbuilt, with new starts expected to average steady to slightly down through the end of 2005.

Spending for public safety, amusement and recreation, religious, and manufacturing facilities has picked up from the weakest period earlier this year, but is still below the spending level of late last year. However, these markets had the best performance in May.

Specifically, amusement and recreation spending remained steady while manufacturing spending rose 4.5 percent, public safety rose 3 percent, and spending for religious buildings rose 2.3 percent.

The initial recovery in education and health care is on the private side of these sectors and in the public K–12 area, which is under intense pressure to add capacity for more students. However, education construction spending has been stalled to a $75 billion annual pace for two years.

State tax collections had been down, but rebounded sharply recently. This will lead to a substantial boost in school and college construction funds when the next fiscal year begins, in July 2005. That means the strong post-recession rebound in education construction will be delayed until 2006.

Heavy-construction spending slipped 0.6 percent (about 1 percent after inflation) but will post the fourth consecutive quarterly increase in the just-completed spending quarter. This sector is set for an extended period of above-average growth. Contractors bought 32 percent more construction equipment this May than last May, and heavy contractors have added 15,000 jobs in the same time period.

Source: Reed Construction Forecast Monthly, Vol. 1, Issue 3. For subscription information, visit www.reedconstructionmonthly.com or call (800) 424-3996.