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Nonresidential Construction Continues Strong Despite Evidence of Cooler Economy

Latest News > Industry News

With equity markets on a wild roller-coaster ride through much of the summer and a steady drumbeat of bad news in the housing market, it was bound to happen. Economists and industry analysts are revising downward their forecasts for total construction and economic activity as a whole for the remainder of the year and 2008, even as they predict continued strength in nonresidential construction.

The Architecture Billings Index (ABI) of the American Institute of Architects (AIA) receded in August from a near-record in July. The index for August was 53.9 versus 60.0 in July. The decline came after several months of rapid growth. It was the biggest drop since September, 2006.

However any score over 50.0 indicates an increase of billings, so growth continues, simply at a more moderate pace. The Index is considered a leading indicator of construction activity nine to twelve months forward.

"This really shouldn't trigger any concern that demand for nonresidential construction projects will dry up," said AIA Chief Economist Kermit Baker. "It's actually characteristic that after consecutive months of very high numbers things level off a bit and return to the more temperate positive conditions that we have seen over most of the year."

However, problems in the subprime mortgage market have sparked apprehension in the industry that credit for nonresidential construction projects would be more difficult to secure, Baker added.

The overall construction forecast is weaker, dragged down by persistent problems in the single-family homebuilding sector. Single-family housing starts fell -7.1% in August after falling -7.3% in July. The consecutive months of steep decline brought single family starts to their lowest level since 1993, the Federal Reserve Bank of Cleveland reported.

During August, permits for single-family housing, another leading indicator of construction activity, fell -8.1%, the largest tumble since 1995, sending permits to their lowest level since 1995.

With an eye to the housing market, Reed Construction Data ( revised down its forecast of total construction spending, even as nonresidential construction continues its growth.

Reed now expects total spending this year to decline -1.0%, compared to last year's +5.3% increase. However, nonresidential put-in-place investment is expected to increase +16.6% in 2007, versus +12.7% in 2006, according to Jim Haughey at Building Team Forecast. The Reed Construction Data forecast for total construction in 2008 is now +8.3%.

The loss of some 4,000 non-farm jobs in August also dimmed economic prospects. Construction lost 22,000 jobs in August and residential construction lost another 23,000. During the month, service jobs grew (+60,000) as did educational services (+13,800). In addition, there were "striking downward revisions to June and July's employment estimates (-81,000 jobs combined)," according to the Cleveland Federal Reserve.

On the bright side, the Consumer Price Index (CPI) dropped -1.7% in August, largely driven by lower energy prices. (Oil prices spiked up to new records during the week of September 16, however.) Without food and energy prices in the mix, the CPI rose just +1.8%, a full percentage point less than the July increase of +2.9%.

Likewise the Producer Price Index (PPI) dropped -15.3% in August, again driven by declining energy prices. Excluding food and energy, the core PPI rate rose 2.3%, in line with the year-to-date average of +2.2%, the Cleveland Federal Reserve added.

When the Federal Reserve lowered its benchmark interest rate by -0.5% on September 19, policymakers said the decision was based on, "potential for the sell off in credit markets to hobble economic growth." The interest rate cut also attacked the problem that started it all, a housing recession that's gone on for more than a year and with no end in sight, and the meltdown in questionable sub-prime mortgages that sparked the decline.

Equity and credit markets reacted positively to the Fed's move. Analysts are cautiously optimistic that the turmoil in these markets will recede. After the rate cut, bond traders predicted that the Fed would cut the rate again before the end of the year, arguably another plus for construction activity. However, for the moment it's a question of wait-and-see how well construction and the economy as a whole responds.