Some construction markets are already recovering from recession; others wait.



Many contractors are hoping 2004 is the year the sheet-metal industry finally recovers from the U.S. economic slowdown. Many companies have been grappling with layoffs and overcapacity for the last three years.

No publicly available studies specifically look at trends for the HVAC or sheet-metal industry, but several research firms have released overviews of the construction market and U.S. economy that may provide a glimpse of what's ahead. Perhaps not surprisingly, the numbers are mixed.

In October, the National Association of Home Builders reported that confidence in the market for single-family homes rose to its highest level in nearly four years. The group's October Housing Market Index was 72, the highest since December 1999. That should be good news for contractors who specialize in residential work.

Source: McGraw-Hill Construction Dodge

Great expectations

The index comes from a monthly survey of single-family home builders. The builders are asked to rate current sales and future expectations as good, fair or poor. Builders are also asked to rate customer traffic as "high to very high," "average" or "low to very low."

The scores are used to create a seasonally adjusted index. Any number over 50 indicates a majority of builders view the market as good.

"As the HMI indicates, the builders' outlook for single-family housing is very good, and we expect the improving economy to sustain robust levels of housing market activity, even though mortgage interest rates are somewhat higher than the record lows that we saw earlier this year," said David Seiders, the NAHB's chief economist.

After dropping to historic lows earlier this year, interest rates spiked to more than 6 percent in early September. They have remained around 6 percent since.

"The October HMI clearly demonstrates how sensitive the housing market is to changes in interest rates," said Ken Conine, NAHB president and a Dallas-based builder.

The Commerce Department reported a seasonally adjusted 1.86 million building permits were issued in September, a 2.2 percent drop from the 1.9 million permits issued in August, but a 3.2 percent increase from September 2002.

Source: McGraw-Hill Construction Dodge

Markets uncertain

Other sectors of the construction industry continue to show uncertainty. McGraw-Hill Construction Dodge's report on August construction noted that while housing is strong, total construction year-to-date was essentially even with 2002 figures.

The report noted a slight drop in nonresidential building, plus a bigger decline for "non-building" construction such as utilities and public works projects.

The August figures put the Dodge Index at 155 (for comparison purposes, 100 represents the baseline year of 1996). The number was a slight drop from June and July's figures. For the first five months of 2003, the index averaged 149.

"While new construction starts have settled back from a very strong June, August still represents a reasonably healthy month compared to what was reported earlier in the year," said Robert A. Murray, vice president of economic affairs for McGraw-Hill Construction Dodge and author of the report. "The housing market continues to be robust, and commercial building seems to be stabilizing, following the extended declines witnessed a year ago. At the same time, budget pressures are now having some dampening impact on both institutional building and public works."

Rebound to come

Industry consultant FMI Corp. sees building and related industries picking up by summer. In his report on the outlook of construction in the third quarter of 2003, FMI Corp. manager Randy Giggard said the nonresidential construction market might see a stronger recovery in the middle of 2004 as excess capacity issues start to subside.

However, "Office construction, especially in areas affected by the hi-tech slump, will continue to falter for the next 12 to 18 months," Giggard said. He noted that industrial markets have made progress during the past three years, but "Unfortunately, it will continue to have excess supply until new orders and plant-capacity utilization rates pick up."

Another possible economic indicator is the August report on machine-tool consumption from the American Machine Tool Distributors' Association and the Association for Manufacturing Technology.

Consumption in August totaled $150.99 million, up more than 16 percent from July, but a 3.2 percent drop from the $155.93 million total reported a year earlier. The report is compiled by the two trade associations representing the production and distribution of manufacturing equipment from figures supplied by member companies.

With a year-to-date total of $1.2 billion, 2003 is down more than 16 percent from 2002. The report provides regional and national U.S. data on domestic and imported machine-tool use. Experts view the report as a barometer of the nation's economic health, since industries typically invest in metalworking equipment to increase capacity and productivity when business is improving.

Despite the lower numbers, association officials were upbeat.

"August orders and increased output among many of our customers appear to be signaling an end to the decline in manufacturing-technology investments," said John B. Byrd III, president of the AMT. "While a capital-spending recovery has not yet begun, better times certainly seem to be on the horizon."