Special Report: 2002 Construction Transport Forecast

Jan. 1, 2002
IN 2002, construction in the United States will decline from its record year of 2001, but it still will be strong. The level of activity should continue

IN 2002, construction in the United States will decline from its record year of 2001, but it still will be strong. The level of activity should continue to provide plenty of loads for the tank truck fleets that specialize in hauling construction materials such as cement and asphalt.

Overall construction in 2002 will decline 6.3% from 2001 levels, to slightly above 1998 levels, an industry economist forecasted in mid-October.

But that's not bad, considering 1998 was a record year for construction, said Bill Toal, chief economist, Portland Cement Association. “By historical contrast this would put construction spending back to slightly above 1998 levels, which were record levels of activity.”

Toal spoke at the sixth annual North American Construction Forecast in Washington DC October 16, 2001. The NACF is sponsored each year by CMD Group, a provider of construction information products and services. In addition to Toal, a variety of experts in individual market sectors gave detailed looks at what might lie ahead for those sectors.

Commercial Laggard

Commercial construction, including offices and hotels, will be sluggish, he said. But very low mortgage rates and continued housing demand will temper a decline in residential construction, and strong public works construction will balance more precipitous declines elsewhere.

Toal observed that overall construction will be impacted by a downturn in the economy that was exacerbated by the September 11 acts of terrorism in Washington DC and New York City. “Inflation-adjusted gross domestic product [GDP] declined in the third quarter (2001) with little if any growth in the fourth quarter (2001) and similar results expected during the first quarter of 2002,” he said. “The New York and Pentagon events [will] accelerate the downturn. Along with a further cutback in business confidence, corporate profits, and capital spending, the consumer is now retrenching.”

This falloff is resounding in the concrete industry. In late October, US Concrete Inc, Houston, Texas, maker of precast concrete, reported a 43% drop in net profits because of the economic slowdown and a further drop in construction after the hijacking attacks of September 11.

But already, Toal said, elements are in place that will lead to a rebound in construction late in 2002 and resumption of growth in 2003. “Monetary and fiscal policies are quickly reacting to add stimulus to the economy,” he said. “The large tax cut was already in place. Now, rebuilding of New York City and the Pentagon, along with additional measures, could add between $70 billion and $120 billion additional dollars in federal spending over the next two years. On the monetary front, the Federal Reserve has acted quickly.” As a result Toal expects a significant increase in economic activity in 2003 compared to 2002.

In 2002, Toal predicts higher unemployment, stock market declines, and consumer spending drops to curtail new residential construction, which he said should fall 8.5% from 2001. “This is still mild by historical standards,” Toal said, pointing to collapses in residential construction in 1990 and 1991. “Recovery is then expected by 2003,” Toal said, predicting a 5.8% increase for 2003.

Robust Recovery

At NACF, another economist saw a more robust recovery in residential construction in 2002. “Our current forecast calls for a shallow two-quarter economic recession during the second half of 2001, followed by a spirited recovery in 2002,” said David F Seiders, chief economist, National Association of Home Builders (NAHB).

“The forecast also shows a 10% decline in housing starts in the [2001] fourth quarter (to 1.44 million units), followed by recovery to robust 1.66 million pace by late next year.”

Indeed, in late October, the Commerce Department said sales of new homes dropped 1.4%, as the housing sector showed weakness and sales of new, single-family homes fell to an annual rate of 864,000, the lowest level in more than a year, from a revised rate of 876,000.

But economists were expecting September sales to come in even lower at an 850,000 annual rate, according to a survey of Thomson Global Markets as reported in the Wall Street Journal. However, housing starts rose 1.7% in September 2001, indicating housing still had vigor.

“It's fair to say that downside risks to these forecasts are substantial, and further help from economic policy makers is needed,” Seiders said.

Seiders said he also was counting on a second major dose of fiscal stimulus, on a timely basis, from Congress' economic stimulus package being debated during the last quarter of 2001.

Mortgage Rates

At a separate residential-only forecast October 23, 2001, at the newly renovated National Home Center headquarters of the NAHB, speakers said that despite the terrorist attack of September 11, a healthy number of prospective home buyers remained in the marketplace, and that low mortgage interest rates were helping to moderate the housing slowdown that was occurring.

“We're in an entirely different world in how housing and the economy will evolve,” said Bruce Smith, president of NAHB, and a homebuilder from Walnut Creek, California. A low inventory of unsold new homes, aggressive interest rate reductions by the Federal Reserve, tax cuts and other fiscal stimulus, and low inflation all run counter to the economic indicators that usually signal the start of a recession, he noted.

Citing surveys by the University of Michigan, David Berson, chief economist of Fannie Mae, said that consumer sentiment has rallied from its September 11 lows to levels that are not nearly as deep as in previous recessions. At the same time, a tremendous drop in mortgage rates from a peak of 8.7% in May 2000 is helping to support the industry by making home buying more affordable, he said.

Berson predicted that the current housing downturn would be “the smallest of any in the postwar period” and that the decade as a whole would be one of the strongest for housing growth. Annually, he predicted 1.64 million housing starts for the 2000s, 900,000 new home sales, 5.5 million existing home sales, and $1.6 trillion in mortgage originations.

Also, multifamily housing is staying the course, the NAHB conference revealed. Thomas Bozzuto, president of the Bozzuto Group, said there has been little softening in the multifamily housing sector in the wake of September 11. The occupancy rate of the more than 9,000 units his company manages is averaging 95.3% today.

However, he is budgeting for smaller rent increases next year. He is planning for increases in the 3.5% to 4% range this year, down from increases of 5% to 7% percent in recent years.

Nonresidential Problems

Nonresidential construction will suffer the most in 2002, Toal said at NACF. “Declines in corporate profits have already hit capital investment programs. We expect a 10% decline in private nonresidential construction spending in 2002 after a 5.4% drop in 2001. Office, retail, industrial, and hotel construction will take most of the hit.”

Office construction will suffer from overcapacity derived from the dot-com collapse; retail will be impacted by weak consumer demand; industrial will be affected by profitability problems; and hotels will endure higher vacancy rates precipitated by the post-September 11 drop-off in travel.

This weakness also was addressed by Ray Owens, research officer and senior economist for the Federal Reserve Bank in Richmond, Virginia, who said the commercial real estate market is weak in most regions of the country, due mainly to declines in demand by the high tech sector. Net absorption of office space in the United States has fallen dramatically since early 2000, while office space for sublease has risen in most metro areas. Compared to 10 years ago, commercial still looks sound, though.

Some bright spots in the nonresidential sector were highlighted in an October 2001 report by F W Dodge, a building-research division of McGraw-Hill. The report showed that nonresidential building, especially hotels, rose 11%, with the help of a $75-million casino-related property in Nevada. Warehouse construction and office starts were up 16%, and store construction posted a 2% gain.

A turnaround in nonresidential construction will occur slowly in late 2002, said Glenn Mueller, Johns Hopkins University Real Estate Institute, and real estate investment strategist for Legg Mason Inc. “Demand growth will be stable but slower, and once supply growth slows to match it, equilibrium will return,” he said.

A growth period should begin in either late 2002 or early 2003 as these supply and demand cycles merge. Public market real estate debt will be more acceptable to people skittish about security markets, and Real Estate Investment Trusts (REITs) will play an increasing role in the real estate capital markets, Mueller said.

Infrastructure Construction

As in earlier cycles, public works spending will counterbalance the drop in private sector construction in 2002. Despite current high levels of growth and record spending, public construction will grow in 2002, albeit below 2001 levels, PCA's Toal said. This will moderate the decline in overall construction spending in 2002.

“Public construction, while strong in 2001 (up 10.3%), is now feeling the effects of the slowing economy,” Toal said. Tax revenues to states are below expected levels.

“Highway programs are being cut as we speak despite the increase in federal funding from TEA-21 (Transportation Equity Act for the 21st Century),” Toal said. “We now expect only a 0.5% increase in public construction in 2002 and a 2.0% increase in highway construction, lower than our spring forecast.” That's a rise of 2.0% from $49 billion in 2001, to $49.9 billion in 2002.

Toal said highway spending growth will underpin public sector spending. But it's expected that strong rises in federal road spending in FY 2002 will be weakened by a falloff in state funding due to the recession.

Big building material manufacturer Vulcan experienced this in October 2001. Shares of Vulcan Materials Company, a maker of basic chemicals and construction materials, fell as much as 7% in October, a day after the company reported a 7% rise in third-quarter earnings, as investors worried about a possible drop in state spending on construction projects.

Vulcan had reported record sales in its construction materials unit as highway spending in 2001 increased 12% through August, a factor that has carried the construction industry through much of the year. But public works projects — which account for about 55% of Vulcan's business — are not poised to dry up any time soon, one analyst said.

“The fear centers around the possibility that state budget revenues are declining with the decline in the economy and the states might pull back on spending,” said Jack Kasprzak, analyst with BB&T Capital Markets. “I view that fear as misplaced.”

The level of federal highway funding, and to a lesser degree, state funding in states with constitutionally dedicated fuel taxes may go up if more gasoline is consumed. And like everything else in this climate, predicting gasoline use is problematic.

Gasoline prices were supposed to shoot up in the wake of September 11, and did for a few days as hoarding commenced. But right away, oil prices declined as demand dwindled and supply increased while skittish consumers stayed home and business slowed in the shock of September 11.

By the middle of the next month, the average price of gas was about 27 cents lower than the October the year before, according to the Lundberg Survey. Later, as the attack on Afghanistan started, Lundberg thought fuel prices would climb again, but it didn't happen.

Despite the best efforts of policy makers, public works spending was not a part of either the House or Senate economic stimulus bills being debated in October. A stimulus bill was passed by the House of Representatives October 23 that did not include public works infrastructure funding, but was not part of a Senate bill either.

Transportation Improvements

Supporters did not give up, though. After September 11, many senators supported an increase in transportation infrastructure spending and other public works investment. Senate Majority Whip Harry Reid (D-NV) was promoting $27 billion in transportation improvements, including $12 billion for high-speed rail development.

And in a letter to Senate Majority Leader Tom Daschle (D-SD) and Minority Leader Trent Lott (R-MS), 11 members of the Senate Environment and Public Works Committee urged a boost in public works infrastructure spending in the economic stimulus package.

“Investment in our nation's transportation infrastructure can play a critical role in our efforts to reinvigorate the economy,” the senators wrote. “Through spending on roads, bridges and other transportation capital, we create jobs and stimulate economic activity for both the near and mid-term … With a useful life of many decades, transportation investments afford a continued and steady return.”

The senators also asked for funding of flood control, navigation, restoration, and shoreline protection infrastructure, all heavy users of concrete. “The [Army] Corps [of Engineers] estimates that ongoing construction projects in these areas are artificially constrained by budgetary limitations,” the senators said. “Without such constraints, it is estimated that $1.2 billion could be expended in FY 2002 on current projects.”

Also critical to concrete demand is clean water and drinking water infrastructure. “Although Americans take clean, safe water for granted, our drinking and waste water infrastructure is in disrepair throughout the nation, with literally billions of dollars in documented critical needs,” the senators wrote. “We recommend funding between $1 [billion] and $5 billion in federal matching grants to states and municipalities for the purpose of upgrading this critical, but aging and failing infrastructure.”

Toward the end of 2001, highway construction had stepped up its delivery of projects in the wake of the higher funding provided by TEA-21. Actual highway work put in-place had slowed in 2000 from 1999, and had improved little in 2001. But by summer of 2001 it had risen nearly 20% from the previous year on an annualized basis, to $51.4 billion (1996 dollars) in July 2001, from $42.9 billion a year earlier, the Census Bureau reported.

Economic Stimulus

With the economic stimulus bill under consideration, 46 state departments of transportation indicated 2,200 projects worth more than $14 billion that could get underway within three to six months if added federal funding becomes available, said the American Association of State Highway & Transportation Officials (AASHTO).

Because the Federal Highway Administration reports that every $1 billion of increased investment in highway infrastructure generates 42,000 jobs, estimates were that 75,000 jobs would be created within 12 months of enactment, and an additional 100,000 during the year to follow. The remaining jobs would occur within the next three years. This information was used in the lobbying process for the added infrastructure spending.

Despite its exclusion from the original Senate package, at the end of October, it appeared that public works infrastructure funding still might become a part of the final Senate bill.

In late October, Senate Appropriations Committee Chairman Robert C Byrd (D-WV) proposed an additional $20 billion in infrastructure spending, including $2.5 billion for highways and $2.1 billion for clean and safe drinking water projects. This spending measure would be combined with Sen Max Baucus' (D-MT) stimulus measure, which did not contain a spending proposal.

Highway industry lobbyists argued for even more, contending that a $5-billion figure for highways could be supported from the Highway Trust Fund. They were working to get that figure included, the Associated General Contractors reported October 26, 2001.

As the positive effects of federal government programs and the lagged effects of monetary easing finally work, the economy and construction will benefit, Toal said, anticipating a 4.2% increase in construction in 2003 versus the previous year.

This confidence in the years ahead became clear as the stock market began surging in late October, even in the midst of additional job layoffs and lukewarm consumer confidence.

As the nation becomes accustomed to higher levels of security, the ongoing War on Terror, and a new way of life, the underlying strength of the economy is poised to reassert itself as the nation moves past the shock of September 11.

ARTBA Forecasts 3%-6% Growth in 2002 Highway Construction

SPURRED by continued increases in federal funding, the highway construction market should grow 3% to 6% in 2002, according to an economic forecast by the Washington DC-based American Road & Transportation Builders Association (ARTBA).

ARTBA Vice-President of Economics and Research William Buechner says the $33 billion for highways in the fiscal year (FY) 2002 transportation appropriations bill expected to be approved by Congress and President Bush is the primary reason for the market growth.

“Transportation continues to be the construction market sector least affected by an economic recession,” Buechner says. “Most other segments of the construction market are expected to be down in 2002 as a result of the recession. However, the guaranteed increase in federal funding for highway, bridge, and transit projects provides a solid — and growing — base for transportation investment [in 2002].”

Buechner forecasts that the total value of transportation construction work performed in 2001 will be a record $79 billion, up $7 billion over the 2000 total. State transportation departments will see a 6.5% increase in federal transportation dollars in 2002 under the 1998 highway/transit act (TEA-21).

If Congress includes a $2.5- to $5-billion highway component in the stimulus package now being debated, the growth of the highway construction market in 2002 could increase an additional two percentage points, Buechner says. A $5-billion stimulus would also quickly create more than 100,000 American jobs.

Buechner, a Harvard-trained economist who served the Joint Economic Committee of the Congress for nearly two decades before joining ARTBA, cautions that the recession could impact some state transportation capital improvement budgets for FY 2002. An ARTBA survey of state transportation and bridge officials, however, suggests most state transportation budgets will not be negatively affected in 2002.

  • Congress is expected to provide the TEA-21 guarantee of $6.7-billion for mass transit programs in FY 2002, an almost 8% increase over the FY 2001 level. Increases in federal funding for transit under TEA-21 should give a substantial boost for construction of subway and light rail systems.

  • Congress is expected to provide the full $3.3 billion for the Airport Improvement Program (AIP) promised in the Aviation Investment and Reform Act for the 21st Century (AIR-21) for FY 2002. This represents a 78% increase over the FY 2000 level of $1.85 billion. A gain of 10% to 20% in the value of construction work performed on runways and other airside projects is likely.

    Among the other key findings in Buechner's 2002 forecast:

  • States stepped up their obligation of federal highway funds for projects during FY 2001. The total amount of federal highway funds obligated for projects by state departments of transportation was $26 billion, a 9% increase over the FY 2000 level. The pace of spending by the states is accelerating and that should mean more construction work ahead.

  • According to data provided to ARTBA under contract with F W Dodge, the value of new contracts awarded for transportation projects by all levels of government in 2001 was up by 9% over 2000. The strong growth in new contracts during the past two years is another indicator that highway and bridge construction should take a jump in 2002.

Sen Byrd Proposes Infrastructure Spending to Boost US Economy

Senate Appropriations Committee Chairman Robert C Byrd (D-WV) has called for $20 billion in infrastructure spending to be included as part of the economic stimulus package. The proposal includes $2.5 billion for highway improvements, $2.1 billion for clean and safe drinking water projects, $900 million for Amtrak improvements, $1.1 billion for mass transit security, $300 million for Amtrak security, and $1 billion for airport security.

The Associated General Contractors of America (AGC) has encouraged its membership to contact their Senators and suggest that $5 billion in highway funding should be included in the economic stimulus package. Some points you should make are as follows.

  • Including additional highway funding in the economic stimulus bill would create jobs and help stimulate the economy quickly, while leaving long-lasting assets.

  • Every $1 billion spent in transportation construction investment creates 42,100 new jobs.

  • The funding is available in the Highway Trust fund, which has an unobligated balance of $20.5 billion.

  • States are prepared to begin construction immediately on several thousand new highway and bridge construction projects.

  • The American Association of State Highway and Transportation Officials recently released a survey of the states that identified 2,277 new highway and bridge projects across the nation totaling $14.2 billion that the states are ready to put out for contract within 90 days.

  • A recently completed survey of AGC members and other construction contractors concludes that contractors will hire new employees within three weeks of receiving a project contract.

  • With over 70% of US freight moving on our highway system, road improvements will add to productivity by reducing congestion and allowing freight to move more quickly.

About the Author

Tom Kuennen