Point of Beginning

Construction Rise One Percent in September 12.1.03

December 1, 2003
New seasonally adjusted annual rate of $518.3 billion.

New construction starts in September increased 1% to a seasonally adjusted annual rate of $518.3 billion, according to McGraw-Hill Construction Dodge, a division of The McGraw-Hill Companies. September showed a mixed performance by the construction industry's main sectors - nonresidential building lost momentum, housing was essentially steady at a high volume, while nonbuilding construction surged upward due to the start of three large power plants. Over the first nine months of 2003, total construction registered a 1% gain compared to the same period a year ago.

September's data produced a 156 reading for the Dodge Index (1996=100), following a revised 154 for August. During the first five months of 2003, the Dodge Index had averaged 149, slightly below the 151 mean for all of last year. In June the Index jumped to 163, as projects that were deferred in the early months of 2003 reached the construction start stage, followed by readings for the Index in the range of 154 to 158 over the next three months.

Nonresidential building in September retreated 7% to $132.4 billion. Modest slippage was reported for the two largest nonresidential categories by dollar volume - school construction, down 1%; and stores, down 2%. More substantial weakening was shown by healthcare facilities, down 7%; hotels, down 24%; warehouses, down 39%; and amusement-related projects, down 54% (compared to an August that included the start of a large sports arena in Arizona). September featured improved contracting for churches, up 3%; public buildings (courthouses and detention facilities), up 8%; and office buildings, up 15%. The gain for the office category reflected the start of a $153 million state office complex in Sacramento CA, a $125 million renovation of a federal office building in Maryland, and a new $63 million state office building in St. Paul MN. Large percentage gains were also reported for manufacturing buildings, up 48%; and transportation/freight terminals, up 53%; with both of these categories advancing from very depressed contracting in August.

During the first nine months of 2003, nonresidential building was down 4% compared to 2002. A number of institutional structure types witnessed reduced activity - transportation/freight terminals, down 2%; healthcare facilities, down 7%; public buildings, down 8%; amusement-related projects, down 9%; and churches, down 14%. School construction showed steady contracting in dollar terms, helped by a heightened amount of renovation work, although square footage for new school buildings dropped 7%.

Manufacturing plant construction in the first nine months of 2003 was also unchanged from 2002, marking a change from the steep declines that were reported in the previous five years. For the commercial structure types, decreased construction was shown by offices, down 10%; and warehouses, down 20%. On the plus side, stores grew 8% in the January-September period, while hotels jumped 17% with the help of several large projects related to casinos and convention centers.

Residential building, at $289.9 billion in September, was down a slight 1% from August. Single family housing settled back 2%, while multifamily housing climbed 8%. The September pace for residential building was still very healthy -- the second highest in 2003 after August, and a full 17% above the average pace for 2002. The homebuilding market continues to be supported by the low cost of financing - after briefly jumping to 6.4% at the start of September, the 30-year fixed mortgage rate retreated to around 6% during the rest of the month. For the January-September period of 2003, residential building was up 11% compared to 2002, due to respective gains of 11% and 9% for single and multifamily housing. By geography, the first nine months of 2003 showed this pattern for residential building - a 13% jump in the West, 11% increases in the South Atlantic, the South Central, and the Midwest; and a small 2% gain in the Northeast.

Nonbuilding construction in September surged 23% to $95.9 billion, the second highest volume for this sector in 2003 after June. A ten-fold increase for the volatile electric utility category was responsible for September's nonbuilding strength, reflecting the start of three very large projects - a $1.2 billion power plant in Iowa, a $439 million power plant expansion in Florida, and a $95 million power plant in Indiana. If these three power plants are excluded, nonbuilding construction in September would have been down 4%. For the public works categories, substantial declines were reported in September for river/harbor development, down 21%; water supply systems, down 22%; and sewers, down 29%. In contrast, highways and bridges rebounded 7% in September, following a slower pace in July and August. Support for highways and bridges came from the start of a $143 million segment of the Woodrow Wilson Bridge in the Washington, D.C., area and a $119 million segment of the T-Rex transportation project in Denver.

For the first nine months of 2003, nonbuilding construction was down 15% as a result of decreased activity across all the major categories. Even with an exceptional September, electric utilities dropped 27% on a year-to-date basis, as the correction from the record high achieved in 2001 continues. The environmental public works categories also showed considerable declines during the January-September period, with sewers down 12%; river/harbor development down 18%; and water supply systems down 20%. Highways and bridges were down 8% in the first nine months of 2003, representing a departure from their steady growth in construction starts over the 1999-2002 period.

The 1% increase for total construction during the January-September period of 2003 was the result of this pattern by region, relative to 2002 - the West, up 5%; the South Central, up 4%; the South Atlantic and the Midwest, each up 2%; and the Northeast, down 13%. The downturn in the Northeast reflects a steep correction by its nonbuilding construction sector, combined with widespread nonresidential declines and only a small increase for housing compared to the other regions.

Source: McGraw-Hill Construction