Nonresidential construction to lead market

Unlike the past few years, when residential had been leading the construction market, it is now nonresidential construction that will be the market leader.

This was an account given by Edward Sullivan, chief economist, Portland Cement Association, who gave his outlook on U.S. construction at Reed Construction Data's 8th annual North American Construction Forecast held on Oct. 15 at the National Press Club in Washington, D.C.

The economy will continue to gain strength in 2004. A 5 percent growth rate is expected for the third quarter and 4 percent or more is expected throughout 2004. This strong economic growth means rising interest rates. So mortgages affordability will start to cool residential construction activity At the same time, as the economy starts to gain traction, there will be an emergence of a nonresidential recovery.

Total cement mirrors total construction activity very closely. Sullivan expects a small 1 percent decline this year followed by a little less than 1 percent gain in real construction activity next year. The bright news is that there seems to be a convergence of factors that will be developing in 2005 that suggest strong growth.

"We have sustained consumer spending strength and the investment environment has improved dramatically" Sullivan said. "Even other economists are saying the third and fourth quarters of 2004 are going to be very successful - in excess of 3.5 percent to 4 percent. Unlike the past, where all you had was consumption added to economic growth, you now have consumption in the investment sector supplementing one another to achieve these growths."

The consumer strength that has been seen is not due to job creation or strong, real income growth. Sullivan says it is because consumers have been borrowing, virtually tapping out home equity. Eighty percent of all mortgages taken out today are for refinancing activity. And yet through 2004, as the economy starts to recover, mortgage rates are going to rise. This also suggests downward pressure on consumer spending.

Turning to employment, Sullivan believes that the labor markets will reach a turning point of zero job losses and zero gains in October. Followed by small, consistent, sustained gains in job creation throughout 2004. The employment outlook is positive.

Sullivan said the construction market is going to be down this year by 1 percent to 1.5 percent and doesn't expect much growth next year in terms of real construction. He suggests that the market will be flat in 2003 and 2004, but at a very high level. In 2005 the United States will see a resumption of growth in construction. Moving forward, as interest rates begin to rise, residential will no longer be the leader. As the economy gains traction, it will be nonresidential that becomes the leader.