Mid-year Data Suggest Economy At Turning Point

The U.S. construction industry has been a mixed bag in 2003, says Kenneth D. Simonson, chief economist for the Associated General Contractors of America (AGC).

Construction employment rose by 100,000 while overall employment fell from July 2002 to July 2003. The value of construction put in place rose 2% in the first half of 2003 compared to the first half of 2002, but year-to-date orders for construction materials, supplies, and machinery are down slightly.

Taking a mid-year look at data from several sources, including the U.S. Census Bureau, Simonson says the construction industry is following divergent paths: residential construction put in place rose 8% in the first half of 2003 compared to the same period of 2002, while nonresidential construction fell 4% over the same period. The loss in nonresidential construction was led by private nonresidential construction, which fell by 9%. Public nonresidential construction rose 2%

“The economy appears to be at a turning point,” Simonson says. “Several indicators suggest economic activity turned up at midyear. However, long-term interest rates jumped at the same time.” He looks for the economy to continue to strengthen over the next few quarters, with continued low inflation and slightly higher interest rates

These trends have several implications for construction:

  • Housing may have a final surge as homebuyers seek to beat higher rates, then will taper off
  • Private nonresidential construction will lag the rest of the economy until excess capacity in manufacturing, offices and warehouses diminishes; construction will decline more slowly but may not grow until the second half of 2004
  • Public construction will decline through the rest of 2003 and 2004 as current projects are completed and falling tax revenues force cutbacks in state and local budgets

One piece of good news is that the worst may be is over for private nonresidential construction. Private nonresidential construction was essentially unchanged from May to June at $217 billion. It has hovered near that figure since last August, indicating that it may be stabilizing, although at a level that’s still down 4.2% from June 2002. “The upshot is that the free fall in private nonresidential construction has ended, at least for now,” Simonson says.

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