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Construction Activity Rises 4% in June 08.06.2002

August 6, 2002
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The value of new construction starts advanced 4% in June to a seasonally adjusted annual rate of $512.9 billion, according to the Dodge Division of McGraw-Hill Construction. While residential building held steady, nonresidential building and public works registered June gains. During the first half of 2002, total construction on an unadjusted basis was reported at $253.1 billion, unchanged from last year's corresponding amount.

June's data produced a 154 reading for the Dodge Index (1996=100), compared to a revised 148 for May. The first six months of 2002 have seen the Dodge Index fluctuate around the 149 mark, which was the monthly average for all of 2001. "Amidst the ups and downs this year, the construction industry has essentially stabilized close to its 2001 pace," stated Robert A. Murray, vice president of economic affairs for McGraw-Hill Construction. "The stability for total construction, however, is the result of divergent behavior by project type. Single family housing has stayed robust, continuing to be one of the healthier parts of the overall economy. Institutional building and public works have shown further growth, as eroding federal and state budgets have yet to have much negative impact at the construction site. But over the past twelve months, commercial building has fallen sharply, in similarity to the broader pullback by business investment."

Nonresidential building in June grew 4% to $160.2 billion. School construction, the largest nonresidential category by dollar volume, rebounded 7% after slipping back in May. An upward push also came from a 60% increase for public buildings, aided by the start of several large courthouses and detention facilities. Showing improvement from very weak levels in May were hotels (up 11%), office buildings (up 20%), and manufacturing buildings (up 27%). June also witnessed steady contracting for stores, but declines were posted by warehouses (down 4%), churches (down 7%), healthcare facilities (down 12%), and transportation terminals (down 52%).

Despite the June gain, nonresidential building during the first half of 2002 was down 11% from its year ago amount. The general weakness for nonresidential building has been largely the result of reduced contracting for commercial building, including stores (down 12%), warehouses (down 28%), offices (down 32%), and hotels (down 36%). Murray stated, "The slide for commercial building over the past year has been steep, with construction now well below the peak levels at the end of the 1990s. While the worst of the decline appears to be over, vacancy rates are now substantially higher in many metropolitan areas, meaning that it will be awhile before commercial building is able to see renewed expansion." The institutional categories have fared better in 2002, with first half increases reported for healthcare facilities (up 29%), churches (up 6%), public buildings (up 1%), and transportation terminals (up 1%). School construction in the first half of 2002 was down 3%, but its level can still be viewed as very strong since the comparison is being made against last year's record high pace.

Residential building in June, at $237.4 billion, was unchanged from the previous month. Single family housing rose 1%, while multifamily housing retreated 7%. The single family market continues to be helped by the low cost of financing - the 30-year fixed mortgage rate averaged 6.7% in June, down from 6.8% in May, and has since dropped to 6.3% at the end of July. The coming months may see homebuyer demand dampened by sagging consumer confidence and the sluggish job market, offsetting the boost from low mortgage rates, but such dampening has yet to become apparent to any significant extent.

Residential building during the first half of 2002 was up 8% compared to a year ago. This was the result of a 10% gain for single family housing, combined with multifamily housing holding steady with the prior year. Residential building witnessed a relatively uniform pattern across the five major regions during the first half of 2002 - the Northeast, up 10%; the South Atlantic, up 9%; the South Central, up 8%; the West, up 8%; and the Midwest, up 7%.

Nonbuilding construction in June jumped 16% to $115.3 billion. Highways and bridges increased 23%, boosted by the start of the $1 billion San Francisco Bay Bridge replacement project. Environmental public works were also strong in June. River/harbor development work grew 19%, sewers advanced 38% with the help of a $111 million sewage treatment plant in Georgia, and water supply systems climbed 41% with the help of a $242 million water tunnel project in California. In contrast, June saw a 24% decline for electric utility construction. Even with several large power plants reaching the construction start stage in June, including a $300 million project in Colorado and a $254 million project in California, the general trend for power plant construction continues to be downward.

During the first half of 2002, nonbuilding construction was unchanged from its volume during the same period a year ago. The public works categories were up 9%, including an 11% increase for highways and bridges. At the same time, electric utility construction fell 40% from its exceptionally strong first half 2001 amount. Murray noted, "The public works market in 2002 has been helped by the higher levels of federal and state funding passed in recent years. However, increased fiscal stress is now limiting funding, which will translate into greater restraint for public works in 2003. This will join the slower pace for electric utility construction already in progress."

On a regional basis, the first half 2002 statistics for total construction compared to last year showed growth in the Northeast, up 5%; the Midwest, up 4%; and the South Atlantic, up 3%. The West and South Central posted declines in the January-June period, dropping 2% and 10%, respectively.

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