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Q2 Report Suggests Short-Term Recovery for Construction Industry Not in the Cards

Jul 1, 2009 12:00 PM

Latest report from FMI Corp. projects total construction in 2009 and 2010 to be down 13% and 7%

After characterizing the outlook for construction in last quarter's report as “just plain ugly,” the latest forecast from FMI, Raleigh, N.C., paints a similar picture for the second quarter. According to Heather Jones, a construction economist for FMI and author of the firm's “Second Quarter 2009 Report,” total construction in 2009 and 2010 is expected to be down 13% and 7%.

Breaking these numbers down specifically by market segment, residential construction is expected to hit rock bottom this year — with a 19% decline in 2009 and 1% in 2010. Nonresidential construction, which typically lags the general economy by about 18 months, is forecast to drop 14% this year with even further declines of 17% in 2010. Year-to-date nonresidential put-in-place construction through April is flat; however, it's expected to decrease sharply throughout the year. Tagged the only bright spot in the forecast, analysts predict nonbuilding construction will increase 4% per year in 2009 and 2010 (click here to see Chart)

According to FMI's “Second Quarter Nonresidential Construction Index (NRCI),” contractors are still reporting backlogs of nine months, which is down from 11 months in 1Q08. Jones finds that tight credit continues to cause cancellations and delays, and project delays — currently at 20% — are four times the normal rate (up from three times in 3Q08). Project cancellations are five times the normal rate and are currently at 10% of backlog (doubled from 3Q08). Based on this economic environment, credit is expected to remain tight through 2010, causing delays and cancellations to increase.

Ultimately, the key to recovering from this grim reality is upping consumer spending. However, this presents a catch-22 situation. As the report states, “Consumers won't spend while their confidence is low, and they can't spend if they don't have income from employment.” To overcome this obstacle, many hope the American Recovery and Reinvestment Act of 2009 (ARRA) will help jumpstart the struggling economy. Although this may prove true, as FMI predicted in its last quarter forecast, the bill will not single-handedly be able to save the nonresidential construction market. According to FMI's 2Q09 NRCI, relief may take longer than expected. “Now that the details of the American Recovery and Reinvestment Act of 2009 (ARRA) projects are beginning to become known, nonresidential building contractors are realizing stimulus funds won't bring an immediate cure for declining backlogs, as 88% of panelists [those surveyed for the NRCI] said they had not yet seen the effects of the stimulus bill. However, 23% expect the bill will increase their backlogs as much as 5% in the next year.”

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