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It Is Time to Get Ready for the Construction Recovery

0 192 Market Intelligence

Contractors and their suppliers should be shifting their focus now from coping with a declining market to planning for an expanding market. Most construction market companies will have to deal with unpaid debts from the long recession and lingering credit rating and equity participation shortfalls for another year or more. Nonetheless, they should be preparing to get a share of soon expanding bid opportunities as soon as they are able to arrange for more capital or credit.

Contractors and their suppliers should be shifting their focus now from coping with a declining market to planning for an expanding market. Most construction market companies will have to deal with unpaid debts from the long recession and lingering credit rating and equity participation shortfalls for another year or more. Nonetheless, they should be preparing to get a share of soon expanding bid opportunities as soon as they are able to arrange for more capital or credit.

GDP has now expanded for three consecutive quarters at average pace of 3.8%, assuming a 3.5% increase in the first quarter of 2010. Concerns about a double dip recession are now seldom heard. Instead the discussion has shifted to how quickly the recovery will proceed. GDP growth in the first three quarters was about the half the pace of previous deep recessions. And the pace of recovery will slow, as always after the initial surge. GDP growth is forecast to average about 2.5% for the balance of 2010 and through 2011.

Construction spending decline ends in a few months. Jobsite construction spending fell 8.4% in the last four months through February. This overestimates market weakness because of the substantial negative impact from unseasonably poor weather during the winter and an implausible surge in residential remodeling reported for last October, the base month. Nonetheless, there was a real decline of about 4-5%.

During that period single family housing construction spending rose only 3.7% during the lull after the expiration of the first homebuyer tax credit. Permits rose sharply to an annual rate of 543,000 in March assuring that housing starts and residential construction spending will rise at a more rapid pace in the spring and summer, probably at a 20% plus annual rate.

Commercial construction spending fell 13% in the four months through February. The drop was 30% for hotels, 12% for office and 6.5% for retail. This decline will slow sharply during the balance of 2010 with spending turning up at yearend. Commercial project starts have trended lower in recent months with March starts very weak but little if any further decline in starts is expected in 2010.

Institutional construction spending continued to increase through last June, nine months after the credit freeze and the onset of a deep recession. Funding for the construction work that continued or was started during that period was already in hand or committed. The recession came late to this sector. Construction spending has dropped 16% since last June. Spending has been just short of steady for the last three months with only a marginal decline forecast during spring and summer based on the recent decline in the value of institutional project starts, especially in education and healthcare.

Heavy construction spending weathered the recession better than building construction spending. Heavy spending rose through last September and has dropped less than 7% since then through February with only minor further declines expected for the rest of 2010. The heavy market received a substantial boost from the “shovel ready” portion of the stimulus plan. That boost is now ebbing with little likelihood of additional federal highway stimulus money. Instead, the failure of Congress to replace the failed federal highway funding system assures that highway construction spending will not keep up with project cost increases until at least late in 2010.

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by Jim Haughey last update:May 6, 2010

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