2002 outlook sees drop in construction

Nov 16, 2001 12:00 PM

As reported in the November 2 edition of Electrical Marketing, after a decade of steady and sometimes spectacular growth, the construction market will slow down through the early part of next year, according to economists at the F.W. Dodge 2002 Construction Outlook Forecast, held Oct. 30 in Washington.

Total construction spending will drop slightly from $481.4 billion this year to $481 billion in 2002, said Robert Murray, vice president of economic affairs, McGraw-Hill Construction Information Group, New York. Regionally, the South Atlantic, West, and other areas of the Sunbelt will fare better than the Rustbelt and other areas of the country with a historic dependence on heavy industry.

The strongest segments of the construction market will be educational building, with a 3% increase to 275 million sq ft of new construction and single-family housing. Although Murray expects new home construction to drop 2% to 1.175 million units, that level of building is still quite healthy and is above the residential construction activity in the last recession, when housing starts dipped below 1 million units.

The school construction market remains healthy because enrollment in K-8 elementary schools remains at or near all-time highs. As this demographic bulge works its way through high school and college enrollment, these market segments will see even more construction.

On the down side of the construction market, office and hotel construction are expected to continue to slide, with office construction dipping 5% to 240 million sq ft (following a 16% decline in 2001) and hotel construction dropping 15% to 50 million sq ft, its fourth year of double-digit declines.

Murray also expects spending on utility construction to decline 11% to $15.5 billion in 2002, but this follows three years of explosive growth. Larry Makovich, senior director and co-head of the North American Energy Group, Cambridge Energy Research Associates, Cambridge, Mass., added that utility construction will peak in 2001 and then “be in a decline that will take several years to work off.”

Makovich said that New York City and the Southeast are tight power markets and will need more capacity through this downturn. He said the wind, solar, and alternative energy markets will grow because of government mandates requiring states to produce certain percentages of their power with green technologies. He added that construction of small power plants close to demand centers would be another growing segment of the utility market.

Murray and David Wyss, chief economist, Standard and Poors, New York, said the health of the overall construction market in 2002 will depend in large part on how quickly the nation comes out of the recession, its reaction to government economic stimulus packages, the Bush tax break, Federal Reserve rate cuts, the impact of the Sept. 11 attacks, and the war in Afghanistan.

While Wyss believes the recession will be mild and will probably be over within the year, he expects it to be rough going for the next few months, with more layoffs and uncertainty stemming from the Sept. 11 events.

“Even before the recession, we were skating on thin ice, but we thought we were going to escape a recession. Now it’s more of a question of how long and how deep,” he said.

Wyss believes the United States will break out of the recession by the end of 2002, but he said for this to happen oil prices must remain stable, and consumer spending, which accounts for two-thirds of the economy, must continue.

Because of the terrorist attacks and war in Afghanistan, the oil issue is critical, he said.

“Oil is not an issue right now, but it could be because of a disruption at suppliers.”

He also said the increasing unemployment figures—though still under what the U.S. economy experienced in the past few recessions—will grow through next spring. He said there have been about 1 million layoffs in recent months, with the telecommunications, airline, and hotel industries hit worst. Wyss added that there will probably be another 2 million layoffs between now and next spring.

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