Suddenly everything seems almost perfect.
Just for a moment, let’s not worry about what’s around
the bend. Just look around. The sun is shining, the sky is blue.
Unemployment (4.7% at this writing) is the lowest in 27 years. Only
once in the past 32 years has CPI inflation been lower, and in that
year (1986) unemployment was up at 7% — much higher than now.
Since May, consumer confidence, as measured by the Conference Board’s
Index, has been in stratospheric areas unseen since 1969. The S&P
dropped 7% one day in October, culminating an 11% drop from the
record high set 20 days earlier. Nevertheless, at the end of that
day it was still 18% up for the year and by mid November it had
regained almost two-thirds of its October drop.
Construction is sailing right along
with the overall mood. New single-family construction is up 1% (unless
noted otherwise, dollar values and comparisons refer to current
dollars, i.e. those without correction for inflation) for the year,
new multifamily building is up 7% and residential improvements are
up 10%. Schools, hotels, hospitals, amusements, churches and parking
garages all are growing in double digits this year. Stores, offices,
public safety and administration, and nonresidential improvements
are also growing well. In the nonresidential building sector the
only segments to decline from 1996 are industrial buildings (which
were expected to do even worse) and service stations. The non building
structure ("heavy" construction) sector is being led by
privately-owned utility construction, which is growing 14%. Highway
construction and water supplies are growing well, at 7% and 8% respectively.
The other nonbuilding structure categories, which are mostly publicly
owned and financed, are not sharing in the general ebullience, and
show declines from 1996.
When we began this brief economic summary,
we decided to ignore what lies ahead and simply enjoy the view.
Now it’s time to try to peek around the bend in the road. It
is precisely the nation’s ebullience that has worried many
economists for some months. Alan Greenspan used the phrase "irrational
exuberance" earlier in 1997 in reference to the stock market.
The fear was that we would embark on a spree of overspending, overbuilding,
overbuying, and over-hiring that would lead to significant inflation,
and the Fed stood poised to dampen our enthusiasm with enough interest
rate increases to break up our party. It appears now that the Asian
stock markets have done the Fed’s work for it. No interest
rate increases are expected in the near future.
Instead, there is greater risk at this
time of gradual deceleration of the economy. After all, this business
cycle will be in its 90th month in January 1998, more than a third
longer than the average cycle of the last 25 years. We fear it may
be getting quite fragile in its old age and there are certainly
signs that this is so. Problems in the Asian economies certainly
increase the drag on our economy. Although 1997 is a record-setter
for most construction categories, the growth is cooling. Most categories
grew at at slower pace in 1997 than in 1996. Total construction,
after accounting for inflation, grew only half as fast in 1997 as
in 1996.
Most ominous of the signs of slowing
is that single-family housing starts are down 4% and the value of
single-family construction is down 2% in real (inflation-adjusted)
terms. Single-family construction is big. It is by far the largest
construction category, accounting for more than one out of every
four dollars spent on construction. More than all new nonresidential
construction combined; four times more than streets and highways;
more in fact than all publicly-owned construction in total. But
the real reason why single-family construction is important is that
it often leads the economy as a whole and several kinds of nonresidential
construction in particular. For example, if houses are built, a
store often follows in a year or so, and factory wheels turn to
fill the store. If the houses aren’t built, not only is the
store not built either, but the people who didn’t feel rich
enough to buy the house probably don’t spend quite so much
on other things, either.
We expect continued slowing of our
economy in 1998, for three main reasons:
1) The underlying structure of the
current business cycle has been showing increasing signs of aging.
2) The upset in the stock market caught
everyone’s attention and injected a note of realism into our
idyllic expansion.
3) The financial turmoil in Asia will
depress US exports into that region.
Our current forecast calls for
residential construction to be down 3%, nonresidential
construction to be flat and nonbuilding structures to
be up 3%, for a total construction decline of 1%.
RESIDENTIAL CONSTRUCTION
Single-family housing
starts will be down 6% in 1998. When starts fall for economic reasons,
as is the case here, high-end construction holds up better than
low-end, the average price of new homes rises, and the total value
of new homes does not fall by as much as starts do. We expect the
value of new single-family construction put in place to fall by
3% in 1998.
As usual, new multifamily construction
will behave as a hybrid between residential and commercial construction.
It will decline by 5% in 1998. Residential improvements are
sometimes an escape from the new home market: either "Let’s
fix up the house so we can sell it." or "We can’t
sell the house so let’s just fix it up and keep it." In
1998 they will decline by 1%.
NONRESIDENTIAL CONSTRUCTION
The nonresidential construction segment
will be led by new education construction in 1998, which
will grow by 8%. Demographics, technology and public perceptions
have converged to produce a continuing swell in school construction
that seems to be focusing on secondary and post-secondary facilities.
High school enrollment is expected to grow by 13% over the next
10 years. Furthermore, increased demand for more elaborate electrical
(e.g., computers) and mechanical systems make schools more expensive
to build.
The second leader for nonresidential
construction is also publicly-owned: the large catch-all category
of new public safety, administrative, and other. It, too,
will increase by 8% in 1998. Between a third and a half of this
category is composed of correctional institutions, which are again
seeing a major surge in construction activity.
Positive growth will also be seen by
new utilities’ buildings, partly because of strong growth
in microwave communications, in the burgeoning demand for telephone
(fax, internet) lines, in deregulated utilities, and also as as
move toward normal from an irrational 14% drop in 1997. The final
category of positive growth in the nonresidential building segment
is nonresidential improvements, which will grow by about
1%. As is the case with residential improvements, this category
sometimes shows counter-cyclical tendencies.
New amusements construction
will lead the downside in 1998, with a drop of 13%. This industry
is solid but volatile, and will simply be waiting for firmer footing
to resume the fun and games. After three straight years of growth
averaging nearly 40% per year, new hotel and motel construction
(which also includes resorts and casinos) will decline 9%. Even
though 1997’s growth was less than half the average of the
three-year boom, do not conclude that demand has finally been satisfied;
it hasn’t. This downturn is simply a breather while owners
wait until business conditions improve and become a bit more stable.
Privately-owned new office construction
will decline 4% in 1998 as investors and potential owners adopt
a wait-and-see attitude. New retail construction will sag
by only 1% as the continuing life-and-death struggle in the overbuilt
retail arena forces the "big boxes" to multiply in order
to please their stockholders, and the smaller stores to relocate,
renovate, or retire.
Industrial output has been increasing
even though industrial construction has now declined, in inflation-adjusted
dollars, to only 62% of its level 15 years ago. This implies a tremendous
increase in US manufacturing productivity, the result of continuing
capital investment, and of re-inventing nearly everything. The weakening
of demand at most levels in 1998, including a decline in exports
to the suffering Asian economies, will further reduce capacity utilization
and the need to build more plant. New industrial construction in
1998 will be down 9%.
New hospital and nursing home
construction will be down less than 1% in 1998. The publicly-owned
portion of that category will continue to grow, and the drop will
be in the privately-owned component, with nursing home construction
faring relatively better than hospitals.
NONBUILDING STRUCTURES
This sector is nearly all heavy construction
and is, except for utilities, largely publicly owned. Highway
construction will be the major growth category in this sector, driven
by the usual broad, deep combination of political factors and by
the reality that our surface-transportation infrastructure has truly
been neglected for years. This category, which is the third largest
of all construction categories, will grow 7% in 1998.
Construction on nonbuilding utility
structures, which include pipelines, powerlines, railroad trackage
and ubiquitous microwave tower, will be off by 2% in 1998, due in
large part to the completion of the initial phase of cell-phone
tower construction.
CONTRACTOR SELF-DEFENSE
Most of the construction categories
will be down in 1998. That means fewer bids, smaller bids, tougher
owners and meaner competitors. But it doesn’t spell disaster.
After all, many construction categories will be having their second-best
year ever, and a few will see record highs. The contractor and designer
who sharpens his management and marketing skills and perhaps picks
up a new skill or two, who chooses work carefully and keeps his
eye on the bottom, not the top, line will very likely emerge smiling
into 1999.
