Point of Beginning

August Construction Activity Advances 7 Percent 10.08.2002

October 8, 2002
At a seasonally adjusted annual rate of $509.4 billion, the value of new construction starts in August rebounded from a lackluster July.

At a seasonally adjusted annual rate of $509.4 billion, the value of new construction starts in August rebounded 7% from a lackluster July, according to the McGraw-Hill Construction Dodge. Double-digit gains were reported for nonresidential building and nonbuilding construction, while housing showed more modest improvement. During the first eight months of 2002, total construction was up 1% compared to the same period of 2001.

The latest month's statistics lifted the Dodge Index to 153 (1996=100), up from a revised 143 for July. So far in 2002, the Dodge Index has fluctuated around last year's average of 149 - four months this year have been above 149, and four months have been below that mark. "The construction industry in 2002 has essentially stabilized close to its 2001 level, following ten straight years of expansion," stated Robert A. Murray, vice president of economic affairs for McGraw-Hill Construction. "The weak economy over the past year led to sharp declines for commercial and manufacturing building, but the slack has been picked up by further growth for single family housing, public works, and institutional building. As shown by the August data, these latter three sectors continue to move at a healthy clip, at least for the present."

Nonresidential building in August jumped 12% to $154.8 billion. The institutional side of the nonresidential market stayed strong, featuring a 16% gain for school construction that included the start of a $100 million high school in Illinois and an $80 million university research building in North Carolina. Transportation terminal work also increased 16% in August, while healthcare facilities climbed 20%. The social and recreational category rose 23%, boosted by the start of a $200 million visitors center at the U.S. Capitol in Washington DC and a $109 million sports arena in Memphis TN.

On the commercial side, offices and warehouses showed some strengthening from a weak July, increasing 5% and 20% respectively. Hotel construction also picked up in August, rising 47% with the help of a $139 million casino expansion in Las Vegas NV. However, store construction was down 5% in August, falling for the fourth consecutive month. Murray stated, "Offices, warehouses, and hotels are now seeing an occasional monthly gain, suggesting that the worst of their sharp correction is now over. At the same time, the sluggish economy and still-rising vacancy rates mean that the start of a sustained construction upturn for these categories is at least several quarters away."

Nonbuilding construction, at $109.2 billion, increased 15% in August. Strong gains were reported for two of the environmental public works categories - sewers, up 16%; and water supply systems, up 41%, with the latter including the start of a $153 million water treatment plant in Atlanta. Highways and bridges, the largest nonbuilding category, held steady; while river/harbor development work was down 48% from an unusually elevated amount in July. The August nonbuilding total was also pushed upward by a 71% increase for electric utilities, reflecting the start of three large power plants, located in Virginia ($450 million), Pennsylvania ($400 million), and Kentucky ($367 million). Murray stated, "The strength for power plant construction in August is a departure from its generally downward trend this year, and it will help make this category's retreat from 2001's record high less severe than earlier estimated."

Residential building in August grew 2% to $245.4 billion. Single family housing edged up 1%, while multifamily housing increased 5%. The demand for single family housing remains at a very high level, as low mortgage rates continue to outweigh the negatives of sluggish employment conditions and diminished consumer confidence. During August, the 30-year fixed mortgage rate averaged 6.3%, down from 6.5% in July, and September has seen a further decline to 6.0%. By geography, residential building in August showed this pattern - the Northeast and West, each up 4%; the Midwest and South Atlantic, each up 1%; and the South Central, down 2%.

During the first eight months of 2002, the 1% increase for total construction was due to this performance by major sector - residential building, up 9%; nonbuilding construction, up 1%; and nonresidential building, down 9%. By major region, total construction in the January-August period was the following - the Northeast, up 7%; the South Atlantic, up 6%; the Midwest, up 1%; the West, unchanged; and the South Central, down 9%.