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Construction Activity Falls 3 Percent in February 04.11.2003

April 11, 2003
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Each of the construction industry's three main sectors registered moderate declines in February compared to the previous month.

At a seasonally adjusted annual rate of $483.6 billion, the value of new construction starts in February slipped 3 percent, according to McGraw-Hill Construction Dodge, a division of The McGraw-Hill Companies. Each of the construction industry's three main sectors - nonresidential building, residential building, and nonbuilding construction (publics works and electric utilities) - registered moderate declines in February compared to the previous month. Table for Monthly Summary of Construction Value

February's data produced a 146 reading for the Dodge Index following January's revised 150. Over the past year, the Dodge Index has hovered around the 150 mark, so February resides within the lower half of the recent range. "Total construction activity during 2003 is expected to see some loss of momentum, and February's mild setback is consistent with that trend," stated Robert A. Murray, vice president of economic affairs for McGraw-Hill Construction Dodge. "Last year, the brisk pace for single family housing offset weakness for commercial building, but sluggish employment and shaky consumer confidence are beginning to dampen homebuyer demand. Tighter fiscal conditions are now having a restraining impact on institutional building and public works. The commercial structure types remain generally depressed, but on a positive note, their up-and-down pattern of recent months suggests that a leveling-off process is underway, following the extended slide witnessed over the past two years."

Nonresidential building in February decreased 2 percent to $142.2 billion. The institutional side of the nonresidential market dropped 7 percent, due to reduced contracting for amusement-related projects (theaters, exhibition halls), down 19 percent; healthcare facilities, down 23 percent; and transportation terminals, down 27 percent. Cushioning the institutional retreat were increases of 3 percent for school construction and 20 percent for public buildings (courthouses and detention facilities). Manufacturing plant construction continues to languish, falling 31 percent after its brief upturn in January.

On the commercial side, February showed gains for offices, up 6 percent; warehouses, up 28 percent; and hotels, up 50 percent. The office category was supported by the start of a $122 million government office building in San Jose CA, a $53 million office building in Rockville MD, and another $53 million office building in Mobile AL. Murray indicated, "Office construction is now showing just half the volume reported back in 2000, but the past few months have seen new office starts stabilize, helped by the occasional large government office project and continued construction in secondary markets." The substantial gain for hotel construction in February was also aided by large projects, including the start of a $57 million hotel in La Jolla CA and a $30 million hotel in Pittsburgh PA. Store construction in February fell 5 percent, running counter to the gains shown by the other commercial structure types.

Residential building, at $255.3 billion, dropped 2 percent in February, as both single and multifamily housing were down 2 percent. Over the past couple of years, the demand for single family homes has been buoyed by low mortgage rates, which outweighed growing anxiety related to weak employment conditions. The cost of financing has continued to recede, with the 30-year fixed mortgage rate averaging 5.8 percent in February (compared to 6.8 percent a year ago), and reaching 5.6 percent by mid-March. Murray noted, "The recent decline in new home sales, however, suggests that diminished consumer confidence is beginning to dampen some of the support coming from low mortgage rates. Reduced homebuyer demand leads to reduced construction, and February's slight drop for residential building is likely to be repeated in subsequent months." By region, residential building in February showed this pattern - the South Atlantic, up 2 percent; the West, up 1 percent; the Midwest, down 3 percent; the Northeast, down 7 percent; and the South Central, down 9 percent.

Nonbuilding construction in February dropped 5 percent to $86.2 billion. Highway construction plunged 30 percent from a strong January, which included the start of several very large projects around the nation, and sewer construction was down 32 percent. On the plus side, bridge construction in February jumped 39 percent, buoyed by the start of a $461 million upgrade to the Tacoma-Narrows Bridge in Washington state and a $107 million segment of the Bay Bridge project in San Francisco. Water supply systems also showed a large February increase, rising 30 percent, while river/harbor development work was up 5 percent. In a brief departure from its broad downward trend, electric utility construction rebounded 45 percent in February, boosted by the start of $400 million power plant in Iowa. February's level of electric utility construction was still more than 50 percent below the average monthly pace reported last year.

On an unadjusted basis, total construction during January and February of 2003 was down 10 percent from the same period a year ago. The first two months of 2002 featured an unusually high volume of construction starts, and it's expected that the gap will narrow as 2003 proceeds. The major sectors showed this year-to-date performance - residential building, up 4 percent; nonresidential building, down 18 percent; and nonbuilding construction, down 27 percent. By geography, total construction during the January-February period was the following - the West, up 6 percent; the South Central, down 9 percent; the South Atlantic, down 10 percent; the Midwest, down 16 percent; and the Northeast, down 31 percent.

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