There is not yet a consensus on three key components of the economic environment for construction in 2009. One is the impact of the new President and the new Congress. A second is the cost of crude oil and natural gas that are the raw commodity source of many construction materials as well as key determinants of income and confidence. Then third is worldwide commodity demand, especially in China, which, as we experienced earlier this year, can dominate construction materials pricing. Here are the assumptions in the current Reed Construction Data constructions spending outlook.

The current outlook projects a 2.1 % drop in current dollar construction spending in 2009 after a 5.8% decline in 2008. A 7.9% rise is projected in 2010 with all construction markets improving.

The Democrats’ firmer control of the Washington agenda will result in additional economic stimulus spending. But little, if any, will go directly to construction. Both the homebuilders are road-builders are lobbying hard for direct cash injections into their market. But so are lots of other industries, notably the auto companies. Financial firms will retain their priority. Washington has been convinced that it can not permit financial markets to freeze up again or collapse. Low income households are second in line. Middle income families at risk of home foreclosures are third in line.

We assume that Congress limits economic stimulus to about $200 billion and directs it to extended unemployment benefits, possibly within weeks, more refunds and direct payments to households by the beginning of spring at the earliest and a variety of mortgage payment relief programs. There will be little if any left for direct spending on construction. This is not the priority problem in Washington and the elapsed time between decision and spending is much longer than for writing checks.

Some of the general stimulus spending will spill into construction. But it will be a smaller share than usual because temporary income windfalls will be used primarily to repair household budgets.

Crude oil prices have dropped into the $60-65 range by mid-November. Natural gas prices have moved similarly. Our forecast assumes that prices stay at about this level in 2009. Significant risks remain of both much lower and much higher prices. Downstream prices have not yet adjusted to $60-65 oil. Fuel, freight and commodity processing costs will drop substantially more in the next few months. Unlike a year ago, there is now a surplus of readily producible oil and gas which provides insurance against abrupt price spikes over the next year. Many of the major oil suppliers, including Iran, Russia and Venezuela are now experiencing critical budget problems from falling prices and sales volumes. They lack the financial reserves to withhold supplies to boost prices. The turnabout to rising construction spending during 2009 is heavily dependent on relatively low and stable energy costs.

Finally, economic growth outside the US has collapsed in the last few months. Generally the drop will be similar to the US in industrial countries but deeper in the developing countries, especially for countries dominated by commodity exports. Overall, GDP growth outside of the North America, Japan and Western Europe will drop from over 6% early in 2008 to under 3% in 2009, about double the drop off in industrial countries. The consequence is the ongoing pullback in commodity prices (and construction materials prices) which should persist into next year followed by more than a year of 3-5% rises in construction materials prices, far below the 20% plus inflation pace earlier this year.

China has announced a $600 billion economic stimulus plan, primarily additional construction funds. This was expected. It will limit the slowdown in the Chinese economy to about 4% from the recent 11% pace but will not stop the ongoing decline in commodity and construction materials prices.