July Construction Activity Drops 4%

Sept. 12, 2003
New construction starts in July dropped 4 percent from a very strong June, according to McGraw-Hill Construction Dodge, a division of The McGraw-Hill

New construction starts in July dropped 4 percent from a very strong June, according to McGraw-Hill Construction Dodge, a division of The McGraw-Hill Cos.

Both nonresidential building and housing were down slightly. School construction and health-care facilities led the construction market, with increases of 12 percent and 22 percent, respectively. One of the weakest markets was manufacturing plant construction, which dropped 29 percent. Through the first seven months of 2003, total construction activity was 1 percent below the same period a year ago.

“The construction industry got off to a sluggish start in 2003, and more recently it has picked up the pace,” said Robert A. Murray, vice president of economic affairs for McGraw-Hill Construction Dodge. “The modest retreat in July was expected, since June was helped by projects that had been previously deferred. July still qualifies as the second strongest month so far in 2003, and it has helped the 2003 year-to-date figures narrow the gap with 2002. At the same time, the construction industry going forward continues to face several constraints — high vacancy rates for commercial properties, plus the sharply diminished fiscal health of the federal and state governments.”

Nonresidential building in July retreated 1 percent to $154.9 billion, reflecting a mix of pluses and minuses among the various structure types. On the plus side, school construction (the largest nonresidential category by dollar volume) jumped 12 percent. Pushing the educational category upward were the start of several large senior high schools in Texas, California, and Illinois, plus a $100 million museum expansion in Washington, DC. Murray said, “While school construction has eased back from its record high in 2001, the volume continues to be generally strong, withstanding for the moment any dampening arising from tight state fiscal conditions.” Health-care facilities rebounded 22 percent after a weak June, aided by the start of a $200 million hospital in Chicago. Warehouses, up 44 percent, also rebounded from a weak June, while hotel construction increased 54 percent with the help of a $135 million convention center-related hotel in Denver.

On the negative side, store construction slipped back 1 percent from its elevated performance of the previous two months, even with the July start of an $80 million mall in Pittsburgh. Office construction retreated 25 percent, continuing its up-and-down pattern of recent months, and once again showing that sustained improvement is at least several quarters away. The smaller institutional project types in July also showed weakening — churches, down 3 percent; public buildings (courthouses and prisons), down 19 percent; amusement- related projects, down 22 percent; and transportation terminals, down 46 percent. Manufacturing plant construction remained very depressed in July, plunging 29 percent.

Residential building, at $267.9 billion, was down 1 percent in July. Single-family housing held steady with the prior month, while multifamily housing fell 4 percent. The volume of single-family housing remains robust — July’s pace was 8 percent above the average for last year. Mortgage rates did rise during July, with the 30-year fixed rate climbing to 5.9 percent by the end of the month (compared to 5.2 percent at the end of June), and August has seen a further increase to 6.3 percent.

During the first seven months of 2003, the 1 percent decline for total construction compared to last year was due to this pattern by major sector — residential building, up 9 percent; nonresidential building, down 5 percent; and nonbuilding construction, down 15 percent. By major region, total construction in the January-July period performed as follows - the West, up 5 percent; the South Central, up 3 percent; the South Atlantic, up 2 percent; the Midwest, down 1 percent; and the Northeast, down 18 percent.