After 2002, Deja Vu?

by Kenneth D. Simonson

Contractors in 2003 may compare the marketplace to the film, “Groundhog Day,” the hit in which Bill Murray plays a weatherman who keeps reliving the same events. And just like the movie, there will be a few variations the next time through.

In the past, the strongest part of construction has been housing, both owner-occupied and rental. The strength in single-family housing appears likely to continue, although that very strength will reduce the number of households seeking to rent. Interest rates should stay low in 2003 and, at the moment, a double-dip recession is only a remote prospect.

Healthcare is another sector poised for a repeat of 2002’s strong growth. The bad news, however, is that we’ll see double-digit increases in employer premiums, consumers’ out-of-pocket costs, and government expenditures for Medicare, Medicaid, and research.

Just as every cloud has a silver lining, these costs will flow money into providers’ pockets, and some will flow back out in the form of new doctors’ offices and clinics, hospitals, drug manufacturing facilities and laboratories, and even pharmacies.

In the first 10 months of 2002, the value of health care facilities put in place (hospitals, medical buildings, and special care structures) was up by 13% from the same period in 2001.

The retail sector last year was another beneficiary from the healthcare
bonanza — drug store construction was up by a phenomenal 42% in January through October 2002 versus 2001. The other big winner in retail construction in 2002 was auto dealerships (up by 22% over 10 months). This is unlikely to repeat in 2003, now that new-vehicle sales have hit the brakes. The rest of retail has been, and will likely continue to be, very uneven as retail sales eke out small monthly gains.

One other strong performer in 2002 was school construction, public and private. Voters on Election Day approved a record number of bond issues, including a $13 billion whopper in California. That should keep school construction going in 2003, even though projects funded through legislative appropriations will be harmed by the sharp drop in state
revenues nationwide.

The rest of private nonresidential construction also appears on a path to relive its recent past — unfortunately. The value of private nonresidential building put in place in the first 10 months of 2002 was 17% less than in the same period of 2001. Even larger declines occurred in manufacturing (-44%), office (-30%), lodging (-31%), and warehouse (-26%) construction.

The manufacturing sector showed signs of life in the first half of 2002 but has slumped since then, with erratic orders and falling employment. Because there is so much idle plant capacity and vacant office space, new construction in these categories is probably still 9 to 12 months off.

Refreshingly, most prices will look familiar, as inflation should be virtually nonexistent. The major exception will also be familiar: insurance. Liability, health, workers’ compensation and surety costs will all keep rising at double-digit rates.

Furthermore, keep your eyes on the “mobile equipment” markets — cranes, concrete pumpers, drilling equipment and other machinery. The Internal Revenue Service has proposed subjecting new mobile machinery to the 12% federal truck excise tax, and both new and existing equipment to taxes on fuel, tires, and highway use. If adopted, this change could cost thousands of dollars per year for each machine.

In summary, 2003 may be the year of “more of the same”— similar to Bill Murray’s fate in “Groundhog Day.” This is good news for a few segments, but be prepared for more tough times for many nonresidential contractors. n

Kenneth Simonson is the chief economist of the Associated General Contractors of America (AGC), located in
Alexandria, VA. He joined AGC in 2001, but has more than 30 years experience analyzing, advocating, and communicting information on the economy and economic trends. Simonson publishes a weekly e-mail newsletter called “The Data DIGest,” and is co-author of AGC’s new monthly Construction Tax News. He can be reached by phone at 703/837-5313 and by e-mail at
[email protected].

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