Projects, Prices Plummet

The freezing of credit markets, combined with sharply reduced expectations for the economy, are drastically lowering the number of construction starts. At the same time, the slowing world economy, along with a rebound in the value of the dollar against some currencies, has driven down many materials prices. Contractors nationwide have reported in the past two months that developers have deferred projects, either because they can’t line up bank financing or they no longer expect to find tenants once an office, hotel, store or warehouse is completed. Meanwhile, as much as $100 billion of municipal bond issues have been postponed or cancelled because of turmoil in the credit markets. That has hurt contractors expecting to bid on highways, schools and public works. The massive intervention by the Treasury and Federal Reserve in the credit markets should unlock bank lending and bond markets in the next few weeks. But the availability of credit is no guarantee that borrowers will rush to take out loans again. Indeed, states are likely to cut back their construction activity, whether financed by bonds or direct spending. Last week, the Center on Budget and Policy Priorities reported that preliminary third-quarter revenue estimates from 15 states “raise the likelihood that large, additional budget shortfalls are developing." Congress appears poised to pass a fiscal stimulus package that includes infrastructure spending. Whether it is enacted in a lame-duck session in November or after a new President is sworn in next January remains to be seen. But enactment should provide a small boost to construction by the second quarter of 2009. A few other construction categories should also hold up reasonably well. The “continuing resolution” that Congress passed in September keeps most federal spending at 2008 levels through early March but boosts spending for base realignment and other military construction, veterans’ hospitals, and homeland security projects. On the private side, power plants, transmission lines, wind farms and refineries appear to be moving ahead. Contractors who still have reason to buy materials should find many prices dropping. The futures price for oil and copper last week dipped below year-ago levels. Diesel fuel should likewise soon fall below year-ago prices. Asphalt prices are dropping also, though not as sharply. Scrap steel prices have tumbled. Steel makers have tried not to lower their selling prices in tandem with the scrap decline, but the strengthening of the dollar against the euro and weakening foreign demand for steel should mean the availability of foreign steel will soon push down domestic steel prices. Gypsum, cement and concrete makers have posted or announced large price increases in recent months but may have to back down. For 2008, I expect nonresidential construction spending to rise 6-11 percent compared to 2007. But much of that dollar increase will be eaten up by material cost increases of 7-10 percent and labor cost hikes of 5-6 percent. For 2009, I predict nonresidential spending will drop by 3-9 percent; materials costs will be down 1-5 percent, depending on the mix of inputs for a given project; and labor costs will rise 3-4.5 percent. To report your recent experience with demand for projects or materials prices, or to receive The Data DIGest, a weekly one-page summary of economic news relevant to construction, write to simonsonk@agc.org.