NEW YORK - New construction starts settled back 2 percent in December to a seasonally adjusted annual rate of $532.6 billion, according to McGraw-Hill Construction.

The housing sector remained steady at a high volume in December, but declines were reported for nonresidential building and public works. For 2003 as a whole, total construction advanced 3 percent to $518.6 billion. This follows 1 percent growth for total construction in 2002.

The December data produced a 160 reading for the Dodge Index, where 1996 figures represent the base line of 100. The figure was down from a revised 164 for November. For all of 2003, the Dodge Index came in at 156.

"The overall level of construction activity was quite healthy during 2003, thanks to the robust volume of single-family housing," said Robert A. Murray, vice president of economic affairs for McGraw-Hill Construction.

"At the same time, it was a different picture for construction's other sectors. The tough fiscal climate in 2003 dampened institutional building and caused public works to lose momentum after four straight years of expansion. Commercial building in 2003 weakened further, but on the plus side this sector showed it was turning the corner, as gains for stores and hotels partially offset declines for offices and warehouses," Murray said.

If total construction is to improve in 2004, the increase will need to come from the commercial sector "since it's expected that single-family housing will ease back from its exceptional 2003 pace," Murray said.

Home construction

Residential building in December was essentially unchanged from the previous month. Single-family housing remained strong through the end of the year, increasing 3 percent in December, while multifamily housing dropped 19 percent.

For all of 2003, residential building climbed 12 percent to $278 billion, as both sides of the housing market showed similar growth in dollar volume - single family up 12 percent and multifamily up 10 percent.

The big plus for single-family housing in 2003 was the low cost of financing, with the 30-year-fixed mortgage rate averaging 5.8 percent for the year, compared to 6.6 percent in 2002. Mortgage rates reached their lowest level in June, as the 30-year rate fell to 5.2 percent, and only a modest increase took place in subsequent months as the 30-year rate finished 2003 at 5.8 percent.

"While still remaining at historically low levels, mortgage rates are expected to edge upward during 2004, which will lead to a slightly less robust pace for home building," Murray said.

Multifamily housing, despite concerns about rising vacancies and flat rents, proved resilient during 2003. On a regional basis, residential construction in 2003 was up 14 percent in the West, while the South Atlantic and South Central regions were each up 13 percent; the Midwest was up 11 percent; and the Northeast was up 6 percent.

Nonresidential

Nonresidential building in December retreated 3 percent. School construction, the largest nonresidential structure type by dollar volume, fell 10 percent for the month. Other structure categories posting December declines included warehouses, down 1 percent; stores, down 4 percent; transportation terminals, down 33 percent; and hotels, down 39 percent. Structure types showing gains for the month included health care facilities, up 6 percent; offices, up 12 percent; amusement-related projects, up 19 percent; and manufacturing buildings, up 40 percent.

For 2003 as a whole, nonresidential building fell 3 percent to $149.7 billion, a decrease less severe than the 9 percent drop in 2002. Weakness was still present for commercial construction, which was down six percent in 2003 due to an 11 percent decline for offices and a 16 percent decline for warehouses.

The institutional side of the nonresidential market in 2003 was generally weaker, reflecting the impact from a tighter fiscal climate. Although school construction was able to rise 3 percent in dollar value, helped by more renovation work, square footage for this structure type fell 6 percent during 2003. Construction of health care facilities dropped 7 percent in dollar terms, as several large hospital chains faced greater financial scrutiny.

The long-depressed manufacturing-plant category posted a dollar-volume gain of 8 percent in 2003, helped by a growing number of plant upgrades. The 2003 level for manufacturing construction was still 59 percent below the 1997 peak.

Nonbuilding construction in December dropped 9 percent from the strong volume reported for the previous month.

For all of 2003, nonbuilding construction fell nine percent to $90.8 billion, reflecting a 6 percent decline for public works and a 30 percent plunge for electric utilities.

The annual figures for total construction in 2003 showed growth in four of the nation's five major regions: the West and South Central, each up 7 percent; the South Atlantic, up 5 percent; and the Midwest, up 3 percent. The Northeast dropped 10 percent during 2003, due to larger percentage declines for its commercial building and public works sectors compared to the other regions, combined with a more modest performance by its housing sector.