One difference between construction economists and their Wall Street cousins is that construction economists tend to be risk adverse, especially in their forecasts. On the other hand, their Wall Street brethren appear to have been risk oblivious, especially when it came to leveraging sub-prime mortgages to the hilt. Last year, most of these economists alluded to problems in the housing market in their forecasts but none predicted the total collapse that would follow in 2007.

As a result, last year’s predictions of modest declines, or modest increases, turned into an actual decline in the value of new total construction ranging from 5% to 8%. Most of this was due to a 25% drop in the value of new residential construction. The impact of the housing crisis would have been even worse except for another unpredicted event, double-digit growth in nearly all the nonresidential building and public works markets.

  • This year’s batch of forecasts are cautiously pessimistic. The consensus is that:
    • Total construction will slip another notch, but no more than a few percentage points.
    • Housing will bounce along the bottom for another year as the market absorbs excess capacity, but there will be no more huge declines.
    • A slowing economy will reel back double-digit growth in the private nonresidential building markets to either the low single-digit realm, or moderate declines from record levels, leaving large volume if somewhat diminished growth. Declines will be resisted by the fact that most nonresidential building markets still have strong market fundamentals.
    • Public construction will hold its own as Congress’ attempt to increase funding butts heads with the Bush Administration’s attempt to reduce deficit spending. But as of now, they are still butting heads with little to show for it.
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A striking aspect of many of the 2008 forecasts is that most of the risk is on the downside. All forecasts assume the economy avoids a recession, which would be the titanic tipping point that could rewrite the book. Yet most economists ad­mit that a recession is possible, if not probable.

Forecasters for 2008 have many concerns. How balanced will the Federal Reserve Board be in walking the tight rope between fighting inflation and preventing recession? What will be the impact of a $100 per barrel for oil? Has the housing market really bottomed out? How weak will the dollar get? Will the consumer, the backbone of the economy, keep spending in the face of foreclosures, tighter credit, higher energy costs and lower real wages? But at the top of most lists is how will the sub-prime mortgage crisis play out and will it spill over into other sectors of construction, or the overall economy?


End of an Era?

The housing crisis accounts for virtually all of the anticipated 8.2% decline in the value of new construction starts this year, according to McGraw-Hill Construction, of which ENR is a unit. “That marks the first dollar decline in the market since 1991,” say Robert Murray, MHC’s chief economist. He predicts that overall construction will slip another 2% next year.

 

FMI Banking on No Economic Recession

The effects of the sub-prime mortgage crisis “will not spread much beyond the housing market and Wall Street,” says Heather Jones, construction economist for Denver-based industry management consultant FMI Corp. “We are probably on the optimistic side of the forecasting business but we don’t see current events impacting the overall economy, which should continue to be strong,” says Jones. “If we are wrong on that, we are wrong on everything else.”FMI’s forecast calls for total construction put-in-place to increase 1.9% next year after slipping 4.8% in 2007. FMI expects markets to follow a more moderate course next year. Single-family housing will slide another 1%, after plunging 28% this year. And, double-digit growth in many nonresidential markets will fall back into the single digits, says Jones. FMI is most bullish on the healthcare market, which it predicts will increase another 12% in 2008, after rising 14% this year

But this is not the end of a more stable construction cycle that began back in 1991, says Murray. “If single-family housing is excluded, construction activity in 2007 registered a 3% gain, and next year’s decline is a very modest 2%,” he says. The downside on the nonresidential building and public works side of the forecast is minimal, says Murray, although the housing market may still hold some surprises.

“In 2008, some of the diminished credit availability will spill over to the commercial building sector,” says Murray. “That being said, market fundamentals are still holding up reasonably well so the decline is expected to be measured and not precipitous.” In addition, the spillover from the housing credit crunch is only a contributing element and not a driving force and when you look at the markets by structure type, you see other reasons for some loss of momentum in 2008, says Murray.

In store construction, there is a slowing in retail sales and a reevaluation of expansion plans is under way by several major chains. Both trends will contribute to a moderate pullback in store construction in 2008, and Murray is forecasting that store construction will decline 7% next year, after jumping 11% in 2007.

Hotel construction is predicted to cool from a frenzied pace of the last few years, in anticipation of the large number of new rooms becoming available at a...