From an economist's standpoint, what do you think will be the top stories for construction in 2009?

I think that there are three major stories and let me address them in reverse order, since my number one story may surprise you.

My number three story is the stage of the cycle for private sector construction. This relates to residential, commercial and industrial work. Housing starts are set to decline from a level slightly over 220,000 units per month, to about 180,000 units. The 220,000-unit figure has applied for the last seven years. Only in the latest two months has the number dropped to 180,000 units, seasonally adjusted and annualized.

The main reason for the decline in starts is the concern that individuals and families are starting to have about their jobs, on account of the recession. A floor for starts will be provided, however, by low mortgage rates and increasing affordability, as home prices decline.

What about the commercial and industrial categories?
Industrial work is comprised of automotive activity, non-auto manufacturing and the resource sector. We all know what's happening in the auto sector, with sales down by about 25% year over year in December and the Detroit Three struggling to survive. In non-auto manufacturing, much of production (e.g., appliances, carpets, home reno products, etc.) is related to the residential sector, which is set for a fall. In resources, the story is the drop in commodity prices, which I will return to later.

In commercial construction, weaker labour markets will mean reduced consumer spending and, therefore, weaker retail construction. Expect to see store closings and papered over storefronts in your local mall and don't be surprised if your favourite restaurant is no longer open next time you visit.

Warehouse work depends on retail and manufacturing activity and so should not be expected to be particularly strong. In office building markets, job cuts and mergers and acquisitions will cause vacancy rates to climb and rents to fall. On a positive note, there wasn't the same degree of overbuilding of office space in the recent good times as there has sometimes been in the past.

Okay, the stage of the cycle is story number three for this year. What is story number two?
Story number two will be the way in which government tries to fill in the gap from the private sector by moving forward with infrastructure work. This will be government's main means to provide short-term stimulus to reduce the pain from the recession. The danger is in ensuring that the work that proceeds is important and productive and not just make-work or pork-barrel activity.

The infrastructure investment should be in areas that will help Canadian industry long term and even more specifically, help us on the trade front. I would encourage spending in the following areas: port expansions; border crossings with the United States; road access to border crossings and rail access to ports; and road and power access to remote resource sites that are crying out for development, such as the Horn River natural gas play in northeastern B.C. and Bakken shale oil in southern Saskatchewan.

This is also an excellent opportunity to get on with expanding electric power generating capacity. Almost all future "green" efforts will involve more use of electricity. Just think "plug-in" cars. There will need to be investment in transmission lines to get power from some new sites, such as wind farms, to connect with main power grids. And, yes, there should be spending in such environmental areas as retrofitting government office buildings and schools. And of course spending on medical facilities will continue to be a priority, with baby boomers approaching retirement age.

How do you feel about tax cuts?
I like tax cuts. I've always liked tax cuts. But I'm not convinced that now is the time to proceed with them. Temporary personal tax cuts have proven to be not that effective as a stimulus tool and permanent tax cuts present a problem for government longer term. It becomes hard to reinstate them when funding is needed.

Governments are going to be spending an awful lot of money over the next couple of years. Fiscal prudence has served Canada's commercial banks well in this financial crisis and it has also helped our governments to weather the storm, so far, in relatively good shape. Let's try to keep the hole that fiscal stimulus digs as shallow as possible.

So now it's time to reveal your number one "surprising" issue for this year.
Yes, well I think the number one story for the industry this year will be construction costs and how they are moderating. Going along with this will be the increase in material and labour availability.

I recently wrote a story that looked at what has happened with respect to commodity prices. The internationally traded prices of nine major commodities − including copper, nickel, aluminum, lumber, coal, oil and natural gas − have declined, on average, by 62.5% from their peak levels in this cycle, mainly in mid 2008, to the present. These commodities are the building blocks for almost all construction materials. Construction costs will be coming down and this has important implications.

The public sector should know that its infrastructure spending will occur at as low a cost as at any time in recent memory. And at as low a cost as is likely in a future period beyond 2010, for that matter. In other words, the public sector will be getting a bargain for its infrastructure investment bucks.

And the same holds true for any owner in the private sector considering an expansion or modernization plan or clean-up-the-environment initiative. I know that investment opportunities in the private sector will be more limited, with many firms simply fighting for survival. But for those firms with enough cash or good access to funding, the present offers a good opportunity to "green" light projects.

I'm sure that this message − now is the time to build, for lowest costs and increased availability of material and manpower − is the one that most major trade associations in the industry will be promoting as strongly as possible in the marketplace as the year progresses.

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