The recession is far from over, but the end of the year may bring relief to the construction industry and the companies that serve it, economists participating in Reed Construction Data’s 2009 Market Insights Webcast said.
“It looks like the bottom for the economy is going to be in the summer or early fall,” said Dr. Jim Haughey, chief economist for Reed Construction Data. Total construction spending is likely to hit bottom toward the end of this year. Residential home starts will probably hit bottom in the summer of ’09.
Haughey said residential construction spending should hit bottom late this summer or in early fall, , becoming perhaps the first construction industry sector to begin the recovery process after a long recession.
Non-residential starts will probably hit bottom later in the fall of this year, and non-residential spending continuing to slip into next winter before finding its floor. “All this presumes that the overall economic stimulus bill is enacted reasonably soon, and the money is spent reasonably quick,” he said.
The stimulus is one of two financing elements that will immediately impact construction. At the time of the presentation, the stimulus included provisions that should drive $12 billion to $15 billion in non-residential construction spending in 2009, Haughey said. It was approved by the House of Representatives on Wednesday.
The other major outside influence on construction is credit, and the prognosis there is improving, but Haughey cautioned that the finance industry worldwide continues to face challenges for many quarters to come. Still, rate premiums for less than prime borrowers, running three percent to six percent now, could fall to two percent to four percent later this year.
“The main problem a lot of borrowers face today, particularly contractors and some construction suppliers as well, is that the assets they offer to the bank as collateral have depreciated,” Haughey said. “Homeowners have houses they can’t sell, land that’s overvalued, and banks are reluctant to take that. Credit access is going to be a restraint on the economy for several years and be particularly severe in the next three to six months.”
Ken Simonson, chief economist for ACG of America, said materials and components prices will remain under pressure this year with diesel remaining below ’07 levels and steel returning to where it began ’08 unless a proposed Buy American provision in the stimulus package has an impact. Lumber and plywood prices should fall and remain below their 2008 prices, as should copper, with concrete holding flat. However, he warned, commodity prices won’t stay down for long.
“By 2010, as world economy picks up speed, we’ll be back in the soup again,” Simonson said.