The news continues to be good for construction distributors and others involved in this important market sector. Despite the strong economy, construction costs for homebuyers, contractors or developers have not risen because commodity inflation has weakened, according to Reed Construction Data and Reed Research. RCD reports that 2004 finished with above-average economic growth, below-average credit costs and relatively low inflation for construction materials. Consumer and business confidence also rose in the past few months.

However, economic reports also indicate that mortgage rates will increase soon. Thirty-year fixed rates are expected to be back to around 6.2 percent before the end of winter, pulled up by rising inflation. As a result, Reed Research says that homebuilding will lose the "cheap credit" boost that dominated last year's late summer/early fall market and will resume the decline that was interrupted last spring.

The strengthening economy, however, will also boost demand for building space as companies add to their payrolls and increase the number of employees. Firms will also look to expand their facilities as they add to their existing offices, warehousing and manufacturing space.

Overall economic growth is forecast to subside from 5 percent at the end of 2004 to 3 to 3.5 percent by the end of this year, considered by economists to be strong numbers.

Public construction, both buildings and facilities, will be the last sector to start building in response to the stronger economy.

The economic risks for this year are well balanced. Oil and terrorism remain the most significant downside risks.

The 2005 outlook for commodity prices—such as oil, lumber, metal and cement— is for a significant slowing of inflation, according to Reed Research. There is no physical shortage of any of these items so supply will catch up to the unexpected surge in demand.

Construction material prices in the U.S. increased 0.7 percent last September (the latest reporting month), measured by the Producer Price Index. This is an 8.7 percent annual inflation rate, down from the 9.5 percent pace over June, July and August. Meanwhile, construction equipment suppliers in the U.S. raised prices 4.8 percent during 2004 while equipment rental rates rose similarly, by far the most rapid price inflation in two decades, according to Reed Research.

Residential construction in the United States remained surprisingly resilient as housing starts jumped to 2,027 million units after a hurricane-weakened September

In 2005, for the first time, the total value of construction activity in the United States will cross the $1 trillion mark. Construction activity accounts for 8.5 percent of U.S. current dollar Gross Domestic Product. The industry directly employs 6.930 million individuals.

Source: Reed Construction Forecast Monthly, Vol. 1, issue 4. For subscription information, visit www.reedconstructionmonthly.com or call (800) 424-3996.