July's data produced a 154 reading for the Dodge Index (1996=100), compared to a revised 160 for June. During the first five months of 2003, the Dodge Index averaged 148. "The construction industry got off to a sluggish start in 2003, and more recently it has picked up the pace," stated Robert A. Murray, vice president of economic affairs for McGraw-Hill Construction Dodge. "The modest retreat in July was expected, since June was helped by projects that had been previously deferred. July still qualifies as the second strongest month so far in 2003, and it has helped the 2003 year-to-date figures narrow the gap with 2002. At the same time, the construction industry going forward continues to face several constraints - high vacancy rates for commercial properties, plus the sharply diminished fiscal health of the federal and state governments."
Nonresidential building in July retreated 1% to $154.9 billion, reflecting a mix of pluses and minuses among the various structure types. On the plus side, school construction (the largest nonresidential category by dollar volume) jumped 12%. Pushing the educational category upward were the start of several large senior high schools in Texas, California, and Illinois, plus a $100 million museum expansion in Washington DC. Murray stated, "While school construction has eased back from its record high in 2001, the volume continues to be generally strong, withstanding for the moment any dampening arising from tight state fiscal conditions." Healthcare facilities rebounded 22% after a weak June, aided by the start of a $200 million hospital in Chicago. Warehouses, up 44%, also rebounded from a weak June, while hotel construction increased 54% with the help of a $135 million convention center-related hotel in Denver.
On the negative side, store construction slipped back 1% from its elevated performance of the previous two months, even with the July start of an $80 million mall in Pittsburgh. Office construction retreated 25%, continuing its up-and-down pattern of recent months, and once again showing that sustained improvement is at least several quarters away. The smaller institutional project types in July also showed weakening - churches, down 3%; public buildings (courthouses and prisons), down 19%; amusement-related projects, down 22%; and transportation terminals, down 46%. Manufacturing plant construction remained very depressed in July, plunging 29%.
Residential building, at $267.9 billion, was down 1% in July. Single family housing held steady with the prior month, while multifamily housing fell 4%. The volume of single family housing remains robust - July's pace was 8% above the average for last year. Mortgage rates did rise during July, with the 30-year fixed rate climbing to 5.9% by the end of the month (compared to 5.2% at the end of June), and August has seen a further increase to 6.3%. But, as Murray noted, the negative impact of rising mortgage rates on homebuyer demand often takes place with a lag. "In the past, when mortgage rates have begun to move upward, potential homebuyers who were 'sitting on the fence' were spurred to action. The dampening impact on demand and construction does not become apparent until several months after rates have moved upward, meaning that any slowdown for single family housing this year is still a few months away." By region, July showed this pattern for residential building - the Midwest, up 1%; the West, no change; the South Atlantic, down 1%; the South Central, down 2%; and the Northeast, down 6%.
Nonbuilding construction in July dropped 15% to $90.2 billion. This followed a 29% increase in June, which featured widespread gains as projects that had been held back earlier in the year reached the construction start stage. The pace for nonbuilding construction in July was still 6% above the average for the January-May period. The public works sector showed these July declines by major category - highways, down 25%; bridges, down 19%; sewers, down 15%; water supply systems, down 13%, and river/harbor development, down 10%. Following a very strong June, contracting for electric utilities in July slipped back 9%, while remaining well above the levels reported in the first five months of the year. July included the start of three major projects - a $600 million power plant in Florida, a $230 million power plant in California, and a $200 million wind farm in Colorado. Murray noted, "Even with the comparatively high levels of new power plant starts in June and July, the broad trend for power plant construction continues to be downward, following the record high achieved in 2001. However, there's still a substantial need to upgrade transmission lines, as highlighted by the recent blackout in the Northeast."
During the first seven months of 2003, the 1% decline for total construction compared to last year was due to this pattern by major sector - residential building, up 9%; nonresidential building, down 5%; and nonbuilding construction, down 15%. By major region, total construction in the January-July period performed as follows - the West, up 5%; the South Central, up 3%; the South Atlantic, up 2%; the Midwest, down 1%; and the Northeast, down 18%.
Source: McGraw Hill Construction, August 28, 2003