NONRESIDENTIAL
Nonresidential construction spending increased 58.5% over the last four years.  But the January vs. December gain was marginal with no gain after accounting for inflation and probably signals the end of the long building boom.  The value of construction started reported by Reed Construction Data has been signaling a decline in job site construction spending soon ahead since early last fall.  No significant drop in construction activity is expected in 2008-09.  Adjusting for inflation, monthly spending reports are likely to vary between small declines and small increases.  Generally, the current level of activity will persist through next year.

Hotels and manufacturing will be the fastest growing markets this year.  Hotel development has slowed abruptly but the pipeline is stuffed with recent starts.  The recent surge in manufacturing construction activity was largely for chemical and commodity processing facilities and could persist for much of the year.  However, construction of big box factories is weak and will weaken further in a slowing world economy. Retail and religious building construction will decline in 2008.  In a slow economy, store replacement and upgrading will not offset the drain on retail space needs from the rapid growth of non-store retailing.

NON-BUILDING (HEAVY ENGINEERING)
Heavy construction spending growth will slip to 10.0% in 2008 and then slightly lower in 2009.  However, most of the dollar growth is due to rapidly rising project costs for steel, concrete, aggregates and diesel fuel. The 10% projection is the average of very strong inflation adjusted growth in three sectors and dollar growth slower than inflation three other sectors. Construction of transportation, communication and power facilities will expand 16.3% in 2008.  These projects are typically late in the building cycle; work currently underway is to boost capacity in response to four years of strong economic growth.  The funding for these projects is largely insulated from the short term turmoil in financial markets.

2008 spending will not keep up with rising project cost for highway, water & sewer and conservation projects.  Highway and conservation work is being restrained by the failure of Congress to adjust funding to cover higher than expected inflation.  Slim balances in Highway Trust Funds reliant primarily on “per gallon” fuel taxes are also a restraint.

RESIDENTIAL
Residential construction spending fell 3.0% in January vs. December.  Homebuilders made another round of production cuts and slowed project completions to avoid adding to the inventory of unsold homes which is already double the normal level. The pace of decline will gradually slow then reverse later in the year but immediately, one or more grim monthly reports on the housing market are likely.  Consumer confidence plunged in February, mortgage rates rose 50 basis points and prospective buyers got a clear signal that home prices will fall further in most markets. Amidst this gloom, the Census Bureau reports that spending for residential remodeling continues to grow modestly slightly faster than project cost inflation. While this time series is often revised substantially, the recent trend suggests that homeowners are willing to spend but are not willing to take the risk of paying too much for a new home or being trapped with a mortgage on a home they moved out of but can not sell quickly.

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