Neither Boom Nor Bust

Dec. 21, 2004
That's the U.S. outlook. Elsewhere, Europe improves, Asia is cautious, and Latin America builds for the future.

Even if by the end of 1998 Chairman Alan Greenspan and his Federal Reserve Board colleagues engineer a quarter of a percentage point rise in the federal-funds rate, the U.S. construction industry will still have a good year. Just how good? Well, during the last five months William Toal, chief economist for the Portland Cement Assn., Skokie, Ill., has swung dramatically from negative to positive. Construction will total an inflation-adjusted $518.9 billion in 1998, a 2.2% increase from 1997's $507.5 billion, Toal now predicts. He had previously forecast a 1998 total of $492.9 billion, 3% below 1997's level. Looking at the details, Toal expects housing starts to be above the 1.3 million mark in 1998 and 1999, not below it as he once anticipated. Similarly, "Now we have commercial construction sort of just flattening out for two years" at a level of $135.7 billion to $135.8 billion. He had forecast a decline. Reasons for the revision: "The economy is [not] going to go into the tank. Interest rates aren't going up that much. And the fundamentals on commercial construction are quite good." Industrial, institutional, and commercial projects are the mainstays of the 21,500 firms belonging to Associated Builders & Contractors, Rosslyn, Va. "And we see continued moderate growth," says Charles E. Hawkins III, the association's executive vice president. That suggests 1998 will be about 3% better than 1997, just about the midpoint of the growth range of the last several years. "It's a slow, steady growth -- as opposed to what we saw in the '80s when things were rampant," observes Hawkins. Severe skills shortages continue to plague both residential and nonresidential construction contractors -- with a shortage of qualified workers actually preventing some of the firms that build factories, hospitals, and stores from bidding on projects. A year ago electricians were the trade in shortest supply -- twice as scarce as carpenters. Now, says Hawkins, the shortage has moved down the skills scale to include such folks as concrete finishers. And, "If you're a welder, you can damn near name your own price today," he quips. 'Unsustainably high' First-quarter 1998 housing starts in the U.S. occurred at a 1.59 million annual rate, well above what Toal anticipates for the full year and at a level that's "unsustainably high," says Stanley Duobinis, director of forecasting at the National Assn. of Home Builders (NAHB), Washington. Among his reasons: Flat or slightly higher interest rates won't stimulate housing starts throughout 1998 as falling rates did in 1996 and 1997. He also figures not as many households will be forming as the nation's employment growth rate falls by 50%. And Duobinis believes last year's surge in second-home purchases won't repeat. His number for 1998 housing starts: 1.449 million. "We're not saying 1998 is a bad year. What we are saying is that some of the big stimulants that made it a wonderful year last year are not going to be there this year," Duobinis stresses. "It's not that interest rates are going up; they're not going to continue to go down. It's not that households aren't going to continue to be formed or that job growth is going to become job loss; it's that they're not going to be as strong as last year. It's all about moderation." A footnote: Among the 315 metropolitan areas ranked in IndustryWeek's 1998 Word-Class Communities report, top-rated Kokomo, Ind., was home to the nation's most-affordable housing in all four calendar quarters of 1997, according to NAHB. In contrast, San Francisco, No. 155 on the list of manufacturing communities, had the least affordable housing during 1997's final quarter. Beyond U.S. Borders As Asia continues to wrestle with the financial woes that began nearly a year ago with the collapse of Thailand's currency, project cost-effectiveness, global procurement, and value engineering are now the watchwords in construction, says Tokyo-based John Dickison, general manager of the Japan office of Schal Bovis Inc., the New York-based unit of a major Anglo-American project-management firm. For example, with cost-effectiveness a key concern, government agencies in Japan are starting to seek out independent project managers such as Schal Bovis, something that "would never have happened three or four years ago," says Dickison. "There is a need to reduce the cost of public works, so there is a more rigorous selection." Although outside Japan private developers have suspended or canceled many projects, construction hasn't exactly come to a standstill. Nevertheless, projects are being carefully scrutinized, especially in Thailand and Malaysia, with an eye to cost-effectiveness, says Dickison. In China, projects are being curtailed, with the government seemingly "aware of the need to do something before things get out of hand" as happened during Southeast Asia's building boom of the earlier 1990s, Dickison notes. As Europe gets ready for the debut of its common currency on Jan. 1, 1999, its construction industry is starting to show modest signs of new life. Builders will likely see 1.2% growth in activity this year, compared with 1997, and a 0.9% gain in 1999. However, these averages hide some dramatic differences in construction activity that exist within Europe. For example, reflecting impressive rates of overall economic growth, construction in Ireland has increased 40% since the beginning of the 1990s. "This year, it will bound ahead by another 12%," says Domenico Campogrande, chief economist at the European Building Federation, Brussels. "[That] means Ireland, a major exporter of construction labor, is calling its workers back because there is so much for them to do at home." In contrast, while the eastern half of Germany is expected to replay 1997's 35% advance, home building in the former West Germany is expected to fall 10%. Creation of an Americas' free-trade zone by the year 2005 is likely to give construction in the hemisphere a big boost. In the meantime, a $2 billion gas-pipeline project will soon bring Bolivian natural gas to such energy-starved Brazilian cities as So Paulo and Prto Alegre. Similar pipelines are already being laid across the Andes, linking Chile and Argentina, while Mexico will back a plan to construct a 438-mile gas pipeline to Central America. Regional economic integration is expected to be advanced by a controversial $1 billion, 26-mile bridge linking Argentina and Uruguay, still in the planning stage. In Chile, approval of legislation permitting privatization of up to 65% of state-owned water and sanitation companies is expected to produce at least $2.5 billion worth of new construction. And despite the damping effect of Asia's financial woes in Brazil -- fewer export opportunities coupled with investor wariness of its still-developing economy -- the state of So Paulo alone expects $32 billion in private capital investment this year -- led by Ford Motor Co., General Motors Corp., and Volkswagen AG. Tanya Clark, Jack Gee, and Larry Luxner contributed to this article.

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