Point of Beginning

New Construction Contracts Slide 5% in September 11.19.2002

November 19, 2002
The value of new construction starts fell 5% in September to a seasonally adjusted annual rate of $483.5 billion, it was reported by McGraw-Hill Construction Dodge. Declines were registered by two of the construction industry’s three main sectors, nonresidential building and nonbuilding construction. The industry’s other main sector, residential building, held steady in September. Over the first nine months of 2002, total construction contract value was essentially even with the same period a year ago.

The latest month’s data lowered the Dodge Index to 146 (1996=100), compared to 153 in August. The Dodge Index for the full year 2001 was 149. “The construction industry continues to hover around its average pace for the previous year, with August slightly above and September slightly below that pace,” stated Robert A. Murray, vice president of economic affairs for McGraw-Hill Construction. “Single family housing remains at a high level, offsetting the prolonged weakness being experienced by commercial building. The institutional building categories have stayed strong for much of 2002, although their loss of momentum in September suggests that tighter fiscal conditions at the state level are beginning to have a dampening impact. The public works categories have also held up fairly well to this point, but they too are expected to see some loss of momentum in the coming months.”

Nonresidential building

Nonresidential building in September fell 12% to $134.1 billion. School construction, the largest nonresidential category by dollar amount, registered a 19% drop following a strong August. “After achieving a record high in 2001, school construction has stayed at an elevated level for most of 2002, but September’s downturn may be a sign that contracting may not be quite as brisk in the months ahead,” noted Murray. Other institutional categories showing declines in September were: amusement-related projects, down 39%; transportation terminals, down 5%; and healthcare facilities, down 2%. An 18% gain was reported for public buildings, boosted by the start of a $125 million prison in Illinois. Church construction was also up in September, rising 29%.

The commercial side of the nonresidential market in September registered generally reduced contracting. Declines were reported for offices, down 14%; warehouses, down 15%; and hotels, down 23%. “Offices, warehouses, and hotels are the nonresidential categories showing the most weakness over the past two years, and the September declines are consistent with that pattern,” noted Murray. Stores and shopping centers, rising 4%, continued to be resilient compared to the depressed activity shown by the other commercial structure types. September also witnessed further weakening for manufacturing plant construction, which fell 14%.

Nonbuilding construction

Nonbuilding construction retreated 7% in September to $101.6 billion. The main reason for the nonbuilding decline was a sharp 88% plunge in the dollar amount of new power plant starts, following the heightened contracting reported in August. During 2002, electric utility construction has generally trended downward, with the first nine months of the year posting a 36% decline compared to 2001. On the plus side, highways and bridges in September jumped 37%, helped by the start of a $237 million highway/light rail project in Colorado and a $136 million bridge renovation project in New York City. Sewer construction in September was up 18%, river/harbor development work was unchanged, while water supply construction was down 35%.

Residential building

Residential building, at $247.9 billion in September, was basically even with August. A slight 1% drop in the value of single family starts was balanced by a 6% gain for multifamily housing. Single family construction continues to be very healthy, with the dollar amount for September 18% above the same month a year ago. “Diminished consumer confidence and sluggish employment conditions have yet to have much of a negative impact on homebuyer demand, which continues to be buoyed by low mortgage rates,” stated Murray. “At the same time, should mortgage rates edge upward, the dampening effect of reduced confidence and lackluster employment will become more discernible on homebuyer demand and construction.” By region, residential building in September showed this pattern – the South Central, up 4%; the Northeast, Midwest, and South Atlantic, each unchanged; and the West, down 1%.

During the first nine months of 2002, the steady performance for total construction was the result of this behavior by major sector – residential building, up 10%; nonbuilding construction, down 2%; and nonresidential building, down 11%. By region, total construction in the January-September period was the following – the South Atlantic, up 6%; the Northeast, up 5%; the West, up 1%; the Midwest, down 1%, and the South Central, down 9%.