Construction

March Construction Climbs 3%

May 3, 2004
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New construction starts in March increased 3% to a seasonally adjusted annual rate of $537.2 billion, according to McGraw-Hill Construction, a division of The McGraw-Hill Companies. Gains were reported for nonresidential building and nonbuilding construction (public works and electric utilities), while residential building eased slightly from a robust February.

The March data produced a 162 reading for the Dodge Index (1996=100), up from a revised 158 for February. Construction activity had experienced a mild loss of momentum at the start of 2004, when the Dodge Index slipped to 155, before showing renewed growth during February and March. "The construction industry has been supported for quite some time by the exceptional strength of single family housing," stated Robert A. Murray, vice president of economic affairs for McGraw-Hill Construction. "In March, single family housing remained at a very high level, but it was other sectors that provided the upward push to total construction. The increase for nonresidential building was not surprising, especially following this sector's sluggish performance at the outset of 2004. The increase for nonbuilding construction was more unexpected, as it came in large part from the start of two very large power plants, in a brief departure from the downward trend for electric utilities."

Nonresidential building in March advanced 4% to $148.7 billion. The institutional structure types generally showed improvement after lackluster contracting in recent months. Most notable was a 112% jump for the social and recreational category, reflecting the start of a $540 million expansion to a major convention center in Chicago. A large gain was also posted by the public building category, up 34%, helped by the start of a $59 million federal courthouse in Eugene OR. Church construction advanced 31% in March, while additional growth was registered by healthcare facilities, up 8%, and transportation terminals, up 6%. School construction, up 1%, was essentially stable in March. Murray noted, "The institutional structure types settled back during 2002 and 2003, as the tough fiscal climate began to restrain construction. The March improvement does not mean that a turnaround is close at hand, but it does suggest that the broader slowdown for this sector will continue to be mild."

The commercial structure types in March showed a mixed performance. Hotel construction jumped 42%, boosted by the start of a $40 million project in Biloxi MS plus a $37 million project in Sacramento CA, and warehouse construction advanced 3%. On the negative side, stores and shopping centers in March retreated 8%, and office construction dropped 26% following its improved pace in February. The March decline for offices continues the up-and- down pattern for this structure type that has been present over the past year. Rounding out the nonresidential picture in March was a 31% gain for manufacturing plants, boosted by the start of a $100 million food product plant in New Mexico and a $40 million paper mill expansion in Wisconsin.

Nonbuilding construction, at $87.2 billion, advanced 15% in March. The electric utility category surged 587% after a very weak February, aided by the start of a $675 million power plant in South Carolina and a $230 million power plant in Florida. Murray indicated, "The construction start series for power plants is often volatile on a month-by-month basis, and it's still expected that the year as a whole will see reduced contracting, as the retrenchment from the 2001 peak continues." The public works sector in March included gains for sewers (up 2%), highways (up 5%), and river/harbor development (up 25%), but decreased activity for water supply systems (down 4%) and bridges (down 25%). "Transportation public works has been generally weaker during the early months of 2004 as the result of several factors," stated Murray. "These include the delay in getting a new multiyear federal transportation bill passed, plus the dislocations caused by this year's large increase in steel prices."

Residential building in March slipped 1% to $301.3 billion. Single family housing was down 1%, while multifamily housing was up a slight 2%. The March level for residential building was still quite high, coming in 7% above the average monthly pace reported during 2003. The cost of financing continued to be very supportive to homebuyer demand during March, as the 30-year fixed mortgage rate receded to 5.4%. Subsequently, the 30-year fixed mortgage rate climbed to 5.9% in April, and it's expected to move higher as 2004 proceeds. By region, March showed this pattern for residential building - the Northeast, up 8%; the Midwest and West, each down 1%; and the South Atlantic and South Central, each down 2%.

During the first three months of 2004, total construction on an unadjusted basis was up 7% compared to a year ago, the result of this pattern by sector -- residential building, up 18%; nonresidential building, down 3%; and nonbuilding construction, down 7%. The large increase for residential building reflects the comparison to a subdued first quarter of 2003, and the year-to-date gain is likely to diminish in coming months. By region, total construction in the first three months of 2004 performed as follows - the South Atlantic, up 18%; the Midwest, up 7%; the South Central, up 5%; the Northeast, up 4%; and the West, unchanged.

Source: Robert Murray's Monthly Report, McGraw-Hill Construction, April 28, 2004

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