Nonresidential construction has exploded by 14%

Economist: Even after subtracting material costs, growth is up 10%

By Tom Stundza -- Purchasing, 9/3/2008 11:39:00 AM

Nonresidential construction is healthier than some economists have suggested. Newly revised data from the Census Bureau finds that seven-month spending on nonresidential construction has increased by 14% above January-July 2007 expenditures. Looking more closely at spending data, the Associated General Contractors of America (AGC) suggests that 4% was cost driven while the other 10% was such other measures as expanded square footage.

Ken Simonson, chief economist for the Arlington, Va.-based trade group, agrees that nonresidential construction strength is broad-based, pointing out that 15 of the 16 Census categories through July --all but religious structures--have increased. “The most robust category so far this year has been manufacturing, which has jumped 46%, thanks to some massive refinery projects but also steel, cement and other plants,” Simonson comments in a press release. “That work should continue at a high level through 2009.” He also is bullish on 2009 spending on power plants, transmission lines and wind farms, which jumped by a third through July. He notes, however, spending on wind turbine and highway projects may decelerate unless Congress renews energy-related tax credits and highway trust fund payouts.

When asked by Purchasing.com how much of this 14% gain in nonresidential construction spending through July was cost-push related, and how much was actual growth in nonresidential construction starts, he e-mailed this reply: ”It appears that roughly 4% of the 14% increase in spending represents higher materials, labor and profit, while 10% is a "real" increase. Materials costs have been rising rapidly, labor costs moderately, and profit margins reportedly have been narrowing as more contractors bid on projects outside their former specialties or geographic areas.”

However, “the nonresidential construction market has stalled in the last few months (so) the spending gains are at best matching cost increases,” says Jim Haughey, chief economist for Reed Construction Data (RCD) in Waltham, Mass. “In the second half of the year, small spending gains are unlikely to keep up with also-smaller cost increases. The gap will be small but big enough to reduce metal, glass and concrete demand.” RCD is owned by Reed Business Information, parent company of Purchasing.