Reed Construction Data announced today that the year-to-date value of construction starts through October 2007, excluding residential contracts, totaled $254.840 billion, 13.4% higher than in 2006. However, the individual month of October was down 9.7% from September. October starts were 5% above the average month in the first quarter of this year, when starts dipped briefly before rebounding to record-high levels during the summer.

October is seasonally stronger than the winter months, so the recent starts decline is a serious sign that peak growth in this building cycle is now in the past. The American Institute of Architects (AIA) survey of “work on the boards” at architectural firms recorded a steep decline in August and September similar to the decline in February through April.

The month-to-month decline was 16.5% for heavy engineering projects, after five record-high months, and 6.6% for non-residential buildings. Commercial building starts were down 2.6% from September, but were off nearly 25% from the record-high level in June, before lenders began to raise mortgage rates and tighten credit standards. Starts of institutional buildings declined 13.2% from September and were 36% below the record-high July level.

The starts decline for heavy projects and institutional buildings is partly due to the failure of Congress to pass any appropriations bills for the new federal fiscal year that began on October 1st. Unfortunately, the budget battle between Congress and the President probably means no final appropriations for a few more months. Hence, some of the decline is due to delays until funds are available.

The new fiscal year for states started strong on July 1st, with record-high starts for institutional buildings in July and heavy projects in August. Public budget managers have become nervous about the tax revenue outlook in the wake of the turmoil in financial markets. They are also concerned about the adequacy of highway trust funds, with the delay in additional federal money, and reduced fuel sales as a result of sharply rising prices. Some rebound in 2008 in both these markets should be expected when oil prices fall, federal appropriations are enacted and states realize that they have underestimated tax receipts for the fifth consecutive year.

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