Even if the U.S. stock market can't seem to make up its mind, most experts are predicting 2003 will be a better year.



Even if the U.S. stock market can't seem to make up its mind, most construction industry pundits and soothsayers are predicting 2003 will be a better year.

Economic indicators in many sectors are showing small gains. The value of new construction starts in August were up 7% compared to July's figures, according to the McGraw-Hill Construction Information Group, which released its report in September. Double-digit gains were reported in nonresidential building and non-building construction, while the housing market improved slightly. Total construction for January-August 2002 was up just 1% compared to the same period in 2001, for a seasonally adjusted annual rate of $509.4 billion.

The Dodge Index for August, an indicator of construction contract value rose to 153 (for comparison purposes, 1996 is used as the benchmark value of 100), up from a revised 143 for July. The index has averaged 149 for most of this year - the same figure reported for 2001.

"The construction industry in 2002 has essentially stabilized close to its 2001 level, following 10 straight years of expansion," said Robert Murray, vice president of economic affairs for McGraw-Hill Construction. "The weak economy over the past year led to sharp declines for commercial and manufacturing building, but the slack has been picked up by further growth for single-family housing, public works, and institutional building. As shown by the August data, these latter three sectors continue to move at a healthy clip, at least for the present."

Nonresidential construction jumped 12% in August to $154.8 billion. School construction registered a 16% gain. McGraw-Hill cited a new $100 million high school in Illinois and an $80 million North Carolina university research building, as well as a $200 million visitors center in Washington, D.C. and a $109 million sports arena in Memphis, Tenn.

Commercial construction rose as well during August, with offices up 5% and warehouses increasing 20%. Hotel construction was helped by a $139 million casino expansion. However, store construction dropped for the fourth consecutive month.

Murray said the occasional gains reported in the commercial sector suggest that the worst is over for that group.

"At the same time, the sluggish economy and still-rising vacancy rates mean that the start of a sustained construction upturn for these categories is at least several quarters away," he added.

FMI weighs in

Another view was offered by construction industry consulting company FMI in its report for the second quarter of 2002.

"It is likely that the U.S. economy stands at the beginning of a new period of expansion, but the construction industry may come a little late to the party," FMI construction economist Timothy Aylor wrote in the report. "(But) Most underlying factors point to a renewed construction expansion beginning later, in 2003."

How much of an expansion differs by sector. Aylor said he expects multifamily residential construction would slow significantly this year before rebounding in 2003. However, residential construction would likely stay soft throughout 2002, and if interest rates or energy prices rise substantially, it could be significantly impacted, Aylor said.

"This slowing is because key factors that determine who can afford to buy a house - home price appreciation, personal incomes, and mortgage rates - point toward less affordability later in 2002."

Nonresidential construction, Aylor predicts, will take years before investment reaches the level of the late 1990s.

But what do sheet metal and hvac contractors think the future will bring? Like anything, it depends on whom you ask. Officials from the Sheet Metal and Air-Conditioning Contractors National Association report that nationwide, man-hours are down about 10% from last year. John Sroka, SMACNA executive vice president, recently said man-hours have dropped close to 20% in the Midwest and San Francisco areas. However, Sroka added that member contractors report the market is up in Philadelphia, New York, New Jersey and Boston.

At any rate, Sroka said, SMACNA contractors have enjoyed almost a decade of non-stop growth, so a correction should be expected.

Many contractors remain optimistic. A survey commissioned last summer by the makers of Liquid Nails adhesive caulk showed many contractors were confident about their prospects for the end of this year and 2003. Forty percent of those polled expected to have more business next year, and 57% were confident that their work levels would remain steady in 2003.

As for the remainder of this year, 96% of those surveyed said they believed their business would grow or remain stable, with 97% saying they felt confident about 2003.

About 52% of contractors also said they were expecting to finish 2002 with an increase in year-end receipts, while 44% were expecting to end the year just about the same as 2001.

Not all comments were positive, however.

"Of course we received comments from both ends of spectrum," said Pete Appell, vice president of Liquid Nails. "We had contractors tell us that work is booming and things are almost too good because they are turning work away. Other contractors used words like 'dismal' and 'just hanging on.' However, the negative responses were really a small minority, compared to a solid 60% of contractors who were very positive and upbeat."