Power construction spending increased at a 24% annual pace in the second quarter with the annual growth rate for June hitting 55%. Power, hotels and manufacturing are the only construction sectors with well above trend growth now. But the 50% growth rates for hotels and factories are already dropping quickly in a weak economy.

The power sector includes electric generation, oil, gas and electric distribution and oil and gas gathering and storage.

Capacity addition information published by the Department of Energy suggests that the surge in power facility construction will continue for several more years although at a somewhat reduced pace. Power construction spending has more than doubled in the last four year. A sizable share of the gain in 2007-08 was the usual catch up in needed capacity after a long period of strong economic growth. This portion will begin to fade early next year and disappear by the end of 2009.

But non-cyclical forces account for most of the surge in power facility construction and they will continue, probably strengthen, during the weak period in the economy during 2008-2010. These include mandates to reduce air pollution, to generate electricity with renewable fuel which requires new power stations and usually distribution lines a high price induced frenzy to develop new oil and gas fields and new technology that permits producing gas from reserves previously thought to be uneconomic.

The next congress seems certain to order a speed up in the development of renewable fuel generating stations, including wind and solar. Oil prices have fallen from the mid-year peak near $150/bbl. but will remain in the $100/bbl. range which is enough to keep exploration and development continuing at a full capacity pace. Gas prices, briefly rose to the $11/mbtu (million British thermal units) early this year but are now back in the $8/mbtu range that has prevailed for several years.

But it is the availability of new supplies, not high prices, that is spurring the rapid growth in investment in natural gas facilities. New horizontal technology permits producing long know reserves in shallow shale formations. A horizontal pipe reaches more of the gas trapped in the rock than does a vertical pipe. New gas wells in shale fields in Texas, Wyoming and Colorado account for most of the 8% jump in natural gas production in 2008 after many decades of declining production. DOE estimates another 4% production increase next year. Each of these new fields needs a gathering pipeline system and a connection to the high volume, long distance gas pipeline.

More LNG (liquefied natural gas) is coming to the US soon. Major capacity expansions have been constructed at most of the five existing LNG terminals. Four new terminals are underway and more are in planning.

These non-cyclical market drivers will keep power construction expanding at an above average pace for several years longer than in past business cycles.

The Reed Construction Data forecast for power construction below is an upward revision from the early August spending forecast for the whole construction market. Power construction spending will increase 32.5% this year and 15.4% in 2009.

Source: US Census Bureau
Forecast — Reed Construction Data

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