Point of Beginning

October Construction Activity Holds Steady 12.09.2002

December 9, 2002
At a seasonally adjusted annual rate of $489.2 billion, contracting for new construction in October was unchanged from the previous month, it was reported by McGraw-Hill Construction Dodge. The stability for total construction was the result of a varied performance by sector - nonresidential building rebounded after a weak September, residential building edged upward, but public works weakened considerably. During the first 10 months of 2002, the value of new construction starts was essentially even with the corresponding period a year ago.

October's data produced a reading of 147 for the Dodge Index (1996=100), the same as the revised reading for September. In the January-October period of 2002, the Dodge Index has hovered around 149, last year's average level, with five months greater than or equal to 149 and five months below that mark. "The construction industry in 2002 has been supported by the strength of residential building, and this continued to be present in October," stated Robert A. Murray, vice president of economic affairs for McGraw-Hill Construction Dodge. "At the same time, the October showing for nonresidential building and public works ran counter to each sector's general pattern this year. October's upturn for nonresidential building provides some indication that the declining trend for this sector is becoming less severe, while the retreat for public works may be the initial sign of reduced activity after an extended period of healthy contracting."

Nonresidential building in October jumped 13% to $148.2 billion, with improvement shown by the commercial categories. Office construction increased 8%, helped by the start of a $93 million office project in Washington DC. Store construction rose 13%, and warehouses registered a 22% gain. Hotel construction climbed 28%, boosted by the start of an $86 million hotel/casino in Atlantic City, NJ. Manufacturing plant construction was also up in October, rising 43% from a very weak level. Two large projects helped to push the manufacturing category upward - a $110 million addition to an automotive manufacturing plant in Alabama and a $99 million pharmaceutical research facility in Delaware.

The institutional structure types also showed generally stronger activity in October. Healthcare facilities increased 17%, and amusement-related projects were up 37%. The public building category grew 52%, aided by the start of a $119-million courthouse in Miami, Fla., and a $106-million prison project in California. School construction (the largest nonresidential category) advanced 1%, although October was below the heightened contracting reported earlier in the year and 17% less than the average pace in 2001. Murray noted, "After achieving a new record in 2001, school construction stayed at a very strong level during the first half of this year, but recent months have seen slower contracting. The need for additional school space remains high, but tighter fiscal conditions at the state and local levels are beginning to dampen construction to some extent." Church construction in October witnessed decreased activity, sliding 15%.

Residential building, at $258.7 billion, rose a slight 1% in October. Single-family housing advanced 1%, while multifamily housing was unchanged from the prior month. Single-family housing continues to be supported by low mortgage rates - the 30-year fixed mortgage rate averaged 6.1% in October, and has since edged down to 6.0%. "Despite diminished consumer confidence, homebuyer demand remains very strong given the low cost of financing and the investment benefits of home ownership, especially when compared to the stock market," Murray stated. By region, residential building in October performed as follows - the South Central, up 5%; the South Atlantic, up 2%; the West, up 1%; the Midwest, unchanged; and the Northeast, down 6%.

Nonbuilding construction in October dropped 19% to $82.2 billion. After registering a very strong amount in September, highway and bridge construction plunged 29%. The public works sector will often show volatility on a month-to-month basis, and the highway/bridge average for September and October was still 5% above a typical month in 2001. Aside from being a correction from an unusually strong September, part of the slowdown for highway and bridge construction in October was related to political factors. Congress was not able to finalize fiscal 2003 spending levels by the start of the new fiscal year (Oct. 1), and a series of continuing resolutions have kept the federal government in operation. Murray indicated, "In early October, there was some uncertainty regarding the levels at which the federal-aid highway program would be funded under the continuing resolutions. This caused some highway construction to be deferred, at least temporarily." In October, the environmental public works categories were mixed - sewers were down 19%, but river/harbor development work rose 7% and water supply systems increased 21%. Electric utilities in October climbed 178% above a very weak September; at the same time, contracting for this category remains well below its most recent peak volume in 2001.

During the first ten months of 2002, the stable pattern for total construction was due to this performance by major sector - residential building, up 12%; nonbuilding construction, down 6%; and nonresidential building, down 10%. By geography, total construction during the January-October period was the following - the South Atlantic, up 7%; the Northeast, up 4%; the West, up 1%; the Midwest, down 1%; and the South Central, down 10%.