The outlook for construction spending weakened slightly since last month for the end of 2007 and the early part of 2008 due to a second round of tightening of credit approval standards and increases in commercial mortgage rates. Some spending will be lost and some will be pushed out until later next year or into 2009. Reed Construction Data (RCD) expects total construction spending, including project cost increases, to increase about 0.5% in the final quarter of 2007, with a 2.2% decline for the full year. Then the spending pace gradually picks up to yield a 5.7% rise in 2008 and a 10.4% gain in 2009.

Residential
New residential construction spending will decline through year end, possibly into early 2008 and then begin a slow recovery from the 35% drop over the past two years. Half of the decline in dollar value and about 40% of the decline in housing starts will be recovered by 2009, which still leaves the housing market in a depressed state for contractors and their suppliers.

Many of the markets in Florida, California, Arizona and Nevada, hardest hit during the housing recession, will experience little, if any, recovery in 2008. The inventory of surplus homes for sale is too large to be absorbed quickly, home prices still have a long decline ahead and the layoffs in housing construction have weakened the local economies. Some housing markets, including Seattle, New Orleans, Jacksonville and Raleigh are already growing and more will experience a turnabout to growth. Home prices are stable or rising in these markets, so prospective homebuyers will buy quickly rather than wait to get the best price.

Non-residential Building
Non-residential construction spending has grown 55% since January 2004 with a further 20% expansion projected by the end of 2009. Market growth that peaked at an 18% annual rate from spring, 2006 through spring, 2007 has now slipped to 13% in the second half of 2007 and will progressively slow to about 6% by the end of 2009. The slowdown in spending is matched by slower growth in new project starts reported by Reed Construction Data.

Most of the key market drivers remain clearly positive, but are not as strong as earlier this year or in 2006. The pace of commercial development has begun to slow because vacancy rates are now steady or rising, rental rate increases have slowed, except for offices, commercial mortgage rates have risen more than 100 basis points (100 basis points = 1.0%), building price appreciation has slowed and space demand expectations have weakened in a subpar growth economy.

The growth in construction spending for institutional buildings, as always, is peaking and then slowing one or two quarters later than for commercial buildings. The growth of tax receipts has slowed from the high 2004 to 2005 pace and public budget reserves fell 15% in the last fiscal year, with a similar decline expected in the current fiscal year.

Heavy/Engineering Construction
Heavy/engineering construction spending will continue to grow in 2008 to 2009 at the same 12% pace recorded in 2006 to 2007. This expansion is weaker than for non-residential building.

The growth in nominal dollars is smaller and project cost inflation is much higher because so much of the material used at job-sites is priced in extremely strong world commodity markets. The relatively slower expansion is also partly due to the slim growth in both federal and state highway trust funds that rely on fuel taxes at a fixed rate per gallon. Inflation does not boost these tax receipts as it does for commercial building rental rates.

Already, construction spending growth has slipped below 10% for largely-tax-financed projects. Furthermore, 10% is about the current growth pace for largely-privately-financed construction of transportation, communication and utility facilities.

For more information, please see U.S. Construction Forecast Tables — Issued November 2007.

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