Point of Beginning

New Construction Starts in July Retreat 09.04.2002

September 4, 2002
Contracting for new construction in July dropped 8% to a seasonally adjusted annual rate of $467.9 billion.

Contracting for new construction in July dropped 8 percent to a seasonally adjusted annual rate of $467.9 billion, it was reported by the Dodge Division of McGraw-Hill Construction. The loss of momentum was present across a wide range of project types - public works, nonresidential building, and single family housing. Despite the weak July, total construction activity during the first seven months of 2002 was essentially even with the same period a year ago.

July's data produced a reading of 141 for the Dodge Index (1996=100), compared to a revised 153 for June. The current year has seen an up-and-down pattern - elevated contracting at the outset of 2002, reduced activity in early spring, a rebound in May and June, followed by a decline in July. "The volume of new construction in July was at the low end of this year's range, but it's still consistent with the sense that total construction activity in 2002 is hovering around last year's average pace," stated Robert A. Murray, vice president of economic affairs for McGraw-Hill Construction.

Nonbuilding construction in July tumbled 16 percent to $95.8 billion, taking back the 16 percent gain that had been reported for June. The prior month was boosted by the start of several very large projects, and the return to more typical contracting produced declines for the major public works categories. These included: highways, down 10 percent; sewers, down 24 percent; water supply systems, down 25 percent; and bridges, down 54 percent (from a June that included the start of the $1 billion plus replacement of the San Francisco Bay Bridge). Even with a weak July, these public works categories during the first seven months of 2002 continue to show strength - highways, up 6 percent; water supply systems, up 13 percent; bridges, up 18 percent; and sewers, up 20 percent. Running counter to the downward trend for public works in July was the water resources category, jumping 79% with the help of such large projects as a $223 million waterway lock replacement in West Virginia and a $138 million storm sewer/tunnel in Atlanta.

The July nonbuilding total also included a 12 percent increase for electric utilities, helped by the start of several large power plants - a $400 million project in New York state, a $300 million project in Virginia, and a $140 million project in Colorado.

Nonresidential building at $140.5 billion, was down 10 percent in July. The commercial categories generally saw weaker contracting - offices, down 22 percent; hotels, down 7 percent; stores, down 2 percent, and warehouses, down 1 percent. Murray stated, "After a lengthy decline, office construction had appeared to be stabilizing at a reduced volume, but July's downturn shows that retrenchment is still in progress. Rising office vacancies and uncertainty about the tenuous economic recovery continue to dampen prospects for a construction rebound." Manufacturing plant construction in July dropped 38 percent, as this project type remains depressed.

The institutional side of the nonresidential market registered a mixed performance in July. Settling back from recent strength were schools, down 6 percent; and healthcare facilities, down 19 percent. The public building category (courthouses and detention facilities) had an especially weak July, dropping 40 percent. Holding steady in July were amusement-related projects, supported by the start of a $107 million sports arena in Phoenix. On the plus side, church construction in July increased 16 percent, while transportation terminal work jumped 36 percent with the help of a $67 million airport terminal project in Seattle.

Residential building in July dropped 3 percent to $231.6 billion. Single family housing posted a 4 percent decline, while the smaller multifamily category advanced 3 percent. Even with its decline, single family housing continues to be very strong, as contracting in July stayed 7 percent above the average pace registered in 2001. "Single family housing has shown some signs of settling back in recent months, but so far the retreat has been very modest," stated Murray. "Homebuyer demand remains very strong, as depicted by the record pace for new home sales in July, and low mortgage rates continue to outweigh the negatives of diminished consumer confidence and sluggish employment conditions."

By region, residential building in July revealed this pattern - the Northeast, up 1 percent; the Midwest and South Central, both unchanged; the South Atlantic, down 4 percent; and the West, down 6 percent.

During the first seven months of 2002, the steady volume for total construction compared to 2001 was the result of a varied performance by major sector. Residential building maintained a 9 percent lead over last year, nonbuilding construction was unchanged, and nonresidential building was down 11 percent. By geography, total construction performed as follows during the January-July period - the Northeast, up 5 percent; the South Atlantic, up 5 percent; the Midwest, up 2 percent; the West, down 1 percent; and the South Central, down 10 percent.