List Your Equipment For Free  /  Seller Login

Economic Forecast: Sunny Days in 2004

Wed December 31, 2003 - Northeast Edition
Pete Sigmund


Many signs indicate that 2004 will be an excellent year for much of the construction industry.

Construction and sales of single family homes beat all projections and set new records in 2003. A pacesetter for the industry and economy, they’re continuing at a very high level in 2004.

Congress is expected to pass the largest highway bill in history by the end of February.

The economy is continuing the recovery that began in November 2001. Industry economists expect that the final figures will show that the gross domestic product (GDP) of goods and services grew at least 3 percent in 2003. They look for at least 4 percent growth in 2004. The rate of growth is accelerating. Reports indicate that the economy grew at an annual rate of 8.2 percent in the third quarter.

The Federal Reserve has kept short-term interest rates at 1 percent, the lowest level in 45 years. Rates aren’t expected to climb much in the year ahead. Mortgage rates are at about 6 percent.

Meanwhile, manufacturing activity was reported at its highest level since December 1983, with factory production expanding in November at an annual rate of 7.3 percent. The Labor Department said productivity advanced 9.4 percent in the third quarter.

There are still problems. Although unemployment fell somewhat (to 5.9 percent) in November and the economy added about 300,000 jobs in the final quarter, more than two million people have lost jobs in the past four years in what has been called a “jobless recovery.” The budget deficit is expected to reach $500 billion next year.

In this challenging setting, here’s how economists in the leading sectors of construction view the industry’s performance in interviews with Construction Equipment Guide (CEG).

Single Family Homes

“Single family housing starts reached a record level of nearly 1.5 million in 2003, beating the level set back in 1977,” said Michael Carliner, economist with the National Association of Home Builders (NAHB) in Washington, D.C. “We had about 1.84 million total starts, including multi-family ones, during the past year, up about 7.5 percent over 2002.”

Carliner said the housing-sales picture is just as good, or better: “Sales have actually been stronger than starts, up about 11 percent.”

As to 2004, Carliner commented: “It will be hard to maintain this pace. We do expect things to ease off a bit in 2004 but, compared with anything except 2003, it would be a great year. We expect single family starts to be down by about 3.5 percent. The inflation-adjusted value of new construction will increase despite this small decline.”

Like several other economists who were interviewed, Carliner expects only a slight rise in interest rates: “We expect mortgage rates to remain around 6 percent or 6.25 percent during the first half of 2004. By the fourth quarter of the year, we’ll be up to around 6.5 percent. Rates may reach 6.6 percent or 6.7 percent by the beginning of 2005.

“We expect inflation will be up a little bit, the dollar will be lower, import prices will be higher, and the economy will be picking up.”

Is some of the blossom off the rose, then, as far as the tremendous market single family housing? Not to a great extent, Carliner told CEG.

“We do expect to see a small decline even though the economy will be growing more rapidly,” he said, “but mortgage rates, which in June were the lowest since 1956, are still very low, running a little under six percent, and we expect them to remain at that range at least until the spring of 2004. This is still very favorable. Adjustable rate mortgages have not gone up as much. They reflect the fact that the Federal Reserve is not raising rates all that much.”

Multi-family housing, meanwhile, though much weaker than single family, remained surprisingly stable, Carliner said, despite the fact that vacancy rates have been going up.

“While the rental market has been weak due to people moving out of rental apartments into single-family housing, we do have an increase in condominium construction and in tax-credit apartments for low-income households,” he said. “Non-residential construction has remained very weak, though maybe it’s hitting bottom; for things like retail, the market is a little stronger.”

Carliner’s final observation on the year ahead: “There has been so little speculative building that there’s not the same risk of a downturn that there has been when builders displayed irrational exuberance; I don’t know whether it’s because builders are being more cautious and wiser, or because the banks are. For whatever reason, inventories are very lean, so the susceptibility to a sharp downturn is much less than in previous cycles.”

Carliner’s view of the economy: “We’re definitely out of recession, partly because of the extraordinary growth in productivity. It hasn’t showed up in employment yet. We do expect some employment gains in the coming year. Even then, they will probably be weak relative to what we experienced during the 1990 to 2001 period.”

Highways & Bridges

Many industry economists expect the highway construction market to grow during 2004 after a decline in 2003.

A major thrust behind growth is increased federal investment. Congress is expected to approve a Fiscal 2004 $33.6-billion appropriation for highways and bridges, an increase of $2 billion over Fiscal 2003.

Both houses of Congress are proposing record authorizations in a new six-year highway and transit bill -– $375 billion in the House measure and $311 billion proposed by the Senate.

William Buechner, vice president of economics and research for the American Road & Transportation Builders Association (ARTBA) in Washington, D.C., said construction work performed on highway and bridge projects during calendar 2004 is projected to be a record $62.5 billion, up from $60 billion in 2003.

He said the House bill would spur an average 7 percent annual growth in the highway construction market over the next six years, while the Senate bill will generate annual growth of 4.8 percent.

Commenting on 2003, Buechner told CEG: “This year, despite all the problems which the states have had, the amount of construction work performed on highways and bridges has actually been up a teeny bit from last year. Part of that is the extra federal money that we had in 2002 and 2003, and which provides a stabilizing force. I suspect a lot is also the good times at the end of the 1990s continuing to play out. The highway market has much smaller cyclical swings because much of it gets set years ahead and projects take a long time. Also, the economy is recovering and state and local budgets ought be just a little better, though some have really big problems.”

Ken Simonson, chief economist for the Associated General Contractors of America (AGC) in Washington, D.C., told CEG that highway spending in 2003 “has run very close to 2002, which was a very strong figure, and I think this will increase by 1 percent to 3 percent in 2004.”

Simonson said public construction other than highways has held up better than he expected but added: “Once the current backlog is finished, there will be much less [public] work going out to bid in 2004. I would not be surprised at a drop of about 5 percent on public construction. Highways and K through 12 school construction, however, will offset sharper losses in other areas.

“The reason a cooldown (in public construction other than highways) hasn’t happened is not that the states have found new money. There’s such a long lag time on construction put in place that if they say “stop the train” the message doesn’t get to the caboose until a year and a half or two and a half years later. Meanwhile, all the construction that they approved is still taking place. If they’re putting up a stadium, interchange, utility, dock or convention center, those things have a very long buildup.”

Robert A. Murray, vice president of economic affairs for McGraw-Hill Construction in New York, NY, said construction starts on highways and bridges should increase about 2 percent in 2004 to $41.8 billion after declining about 6 percent in 2003 (see ’Positive Implications for 2004’).

Commented Nick Yaksich, vice president of government affairs in Washington, D.C., for the Association of Equipment Manufacturers (AEM): “The health of the industry is very much tied to what happens on the highway bill. The industry does not like uncertainty. There has been tremendous uncertainty out there because Congress has not yet acted. A top priority for early 2004 is getting the new highway bill enacted. Congress extended highway funding through February and they are going to have to work very hard to get it done by then.”

Favorable for Dealers

In May 2003, President Bush signed the Jobs and Growth Act into law. This allows purchasers of new equipment to depreciate (write off) an extra 50 percent of the cost of equipment for the tax year in which it’s placed in service. They can also write off 20 percent of the remaining 50 percent of undepreciated value.

The Associated Equipment Distributors (AED), headquartered in Oak Brook, IL, explain that, for a $100,000 machine with a six-year depreciation life, you can depreciate $60,000 in the first year for a total tax savings of $16,000. Equipment must be acquired after May 5, 2003, and before Jan. 1, 2005.

The new law also increased “Section 179” business expense levels, improving cash flow.

Commenting on the equipment rental market for 2004, Christian Klein, AED’s Washington, D.C., counsel, said: “Reliable statistics indicate that about seven cents out of every dollar that the federal government spends on roads makes its way into the equipment industry. Quite obviously, there’s a great deal of space here for the equipment industry. And I’m optimistic because we have these new tax laws in place. They will continue to be rolling into effect. Our surveys also indicate that the new depreciation and expensing provisions will have a very substantial positive impact on equipment purchasing. The economy will keep growing.”

Equipment Manufacturing

AEM, headquartered in Milwaukee, WI, said in its annual forecast that it anticipates a 3 percent to 5 percent growth in construction machinery manufacturing during 2004. It predicts sales increases for all major product groups, especially in the United States.

Machinery manufacturers participating in AEM’s outlook survey expected a 0.4 percent loss in U.S. business in 2003, followed by 5.5 percent growth in 2004. They predicted that equipment shipments in Canada would grow 1 percent in 2003 and 3.7 percent in 2004. They forecast that other worldwide business would grow 0.3 percent in 2003 and 3.4 percent in 2004.

AEM’s 2003 Chairman Ron DeFeo (chairman/CEO of Terex Corp., Westport, CT) said in AEM’s outlook release: “We are certainly more optimistic than we have been in the past few years. We look for a general improvement in business conditions to positively impact the construction equipment manufacturing industry. For our business segment in particular, our customers’ fleets are aging and need replacement. Also, the federal government needs to pass highway spending legislation, and this should boost equipment sales.”

Manufacturers hoped renewed business confidence would spur capital investment, and steady gains in consumer confidence would lead to increased spending.

Total Construction

McGraw-Hill’s “Outlook 2004,” authored by Bob Murray, projected in October that total construction starts would edge up 1 percent in 2003 to $506 billion, and then rise another 1 percent in 2004 to $509 billion. In a December interview with Construction Equipment Guide (see ’Positive Implications for 2004’), Murray upped the figure for 2003 to 3 percent, with 2004 growth being at least 1 percent.

Murray added that the economy grew an estimated 3.1 percent in 2003 and will grow about 4.5 percent in 2004.

AGC’s Ken Simonson commented: “Total construction has been gaining speed. I would call it a 4 percent gain in 2003 over 2002 based on the first 10 months. I expect public construction to run about 3 percent ahead of last year, residential construction to be about 9 percent ahead, and private non-residential construction to finish about 6 percent behind.”

Simonson added, however: “I do expect the boom to fall in 2004. The residential figure will turn from a strong positive to a small negative of 1 percent to 3 percent. I think that public construction will go from a plus three to a something like a minus 5 percent. And I think the private non-residential, which looks like minus 5 percent for 2003, will wind up in the zero to minus five range.”

CIT Survey Shows Optimism

CIT Equipment Finance, Tempe, AZ, a unit of CIT Group Inc., said in its 28th annual construction industry forecast that U.S. leaders in the industry “are significantly more positive about the industry’s prospects than at any time since 1999.” It said the growth in optimism over 2002 was the most impressive in the outlook’s history and “bodes very well for the industry’s prospects.”

CIT surveyed more than 900 contractors and equipment distributors by telephone. The survey’s “optimism quotient” jumped 14 points, with the West South Central region of the United States showing the most confidence.

Important Sectors

Here’s what’s happening in other important sectors of construction, based on McGraw-Hill’s Outlook 2004 and other sources:

Airports — The “Vision 100” Airport Bill signed by President Bush in mid-December provides $3.4 billion for airport construction in Fiscal 2004. This will increase by $100 million a year through Fiscal 2007.

Transit — A small increase is expected in Fiscal 2004 for transit and light rail, to $7.3 billion compared with $7.18 billion in Fiscal 2003.

Environmental — McGraw-Hill sees a partial rebound of 3 percent for water supply projects in 2004, following a very steep decline of 17 percent in 2003. It expects sewer construction to decline 2 percent in 2004, after falling 7 percent in 2002. “Water infrastructure needs continue to be tremendous, reaching over $500 billion,” said one industry source.

Schools — Construction starts in the entire educational building category dropped about 5 percent in 2003, most notably a 20 percent drop for universities. Needs remain strong because of rising enrollments but fiscal stresses in states are expected to dampen construction in 2004, with a 7 percent decline.

Income Properties — After declining 14 percent in 2002, construction of warehouses, offices, hotels and multifamily housing is projected to be down just 1 percent in 2003 and is expected to rise 5 percent in 2004.

Institutional — Construction of healthcare facilities dropped 9 percent in 2003 and will slip six percent in 2004.

Public Buildings — New construction, including prisons, dropped 5 percent in 2003 and will decline another 4 percent in 2004. Construction of religious buildings is down 12 percent in 2003, with a 4 percent decline expected in 2004. Construction of amusement facilities, including theaters, convention centers, and stadiums, retrenched 9 percent in 2003 but is expected to stabilize at the current level in 2004.

Manufacturing — Contracting, spurred by new automotive plants, fell just 2 percent in 2003 after a long, steep, decline. As the recovery continues, construction is expected to increase about 8 percent, but still remain more than 60 percent below its 1997 peak.

It should generally be a happy New Year for the industry.






Today's top stories

Florida's Sarasota Bradenton International Airport Sees $105M Terminal Expansion

Louisville Pump Station Receives $230M Update

Rokbak Haul Track Telematics Boost Uptime With Proactive Maintenance

SISO Air, InTerra Form Strategic Reseller Agreement

Hitachi Construction Machinery Wins Silver in 2024 Anthem Award

Balfour Beatty's Carolinas Operations Selected for Over $36M in Special Project Works

Caterpillar to Spotlight 'Next 100 Years' at CES 2025

Liebherr to Exhibit at World of Concrete 2025









39.95234 \\ -75.16379 \\ Fort Washington \\ PA