The recession will cause modest but extended declines in construction spending for public safety, amusement and recreation and religious buildings but only brief dips in spending for the two largest sectors, education and healthcare. Buildings in the first group are funded with taxes and private funds. Both of these sources have weakened sharply and will remain weal in 2010.

The hospital sector of health care and the higher education sector of education largely fund construction from user fees which have continued to expand, albeit more slowly, during the recession.

Education construction spending peaked in March and has dropped only 3% through August. The drop was entirely for K-12 projects. Higher education spending has continued to increase. A 2% dip is projected by next spring. This consists of stable to slightly rising higher education construction spending and continued declines in K-12 construction spending. K-12 facility managers are afflicted with the deepest drop in state and local tax receipts in more than 50 years. Tax receipts will continue declining in most states well into next year. The local schools most in need of added space are largely in the Southeast and Southwest where the recession is the most severe.

Healthcare construction spending may have peaked in June and fallen 4% since then. However, a more plausible interpretation of recent trends is that healthcare construction activity growth has been on hold for the last year. The forecast expects only a 2% drop from the August level by yearend. Hospital construction spending has continued to expand slowly so far in 2009 while both nursing homes and medical office buildings have experienced small declines in construction spending along with other developer financed projects.

Hospital managers have deferred some scheduled projects until the Washington healthcare debate is resolved. Hospitals may get cuts in Medicare reimbursement rates and tens of millions of new patients at unprofitable reimbursement rates. Alternatively, Medicare reimbursement rates may be unchanged and the new patients may come with acceptable reimbursement rates and new funds from Congress for facility additions. Expect hospital construction spending to be relatively stable until the debate is resolved. Good news will boost spending within a few months. Bad news will quickly cut construction spending.

Key Indicators of the U.S. Market Environment — Sept 2009 Institutional Construction (Driven by demographics and government finances, as well as cyclical factors)
	Year Ago	Previous Month or Qtr.	Latest		Level	Recent Trend	Impact on Const.
Institutional
State & local govt. capital spending, $ billions (U.S. Commerce Dept.)	349	348	Q2	360	Average	Steady
State & local government tax receipts, $ billions (U.S. Commerce Dept.)	1357	1272	Q2	1238	Low	Falling
State budget reserves, % of Exp. (National Governors assn.)	10.5	n/a	FY 09	3.1	Low	Falling
Stock market index (Dow Jones Industrial)	8,451	9,605	Oct 5 09	9,600	Low	Steady
Abbreviations: y/y = year over year; WE = week ending; FRB = Federal Reserve Board; RCD = Reed Construction Data. Table: Reed Construction Data and Reed Construction Data.