The 2020 Mid-Year Economic Update_long

Construction Market to Cool in 2006

Forecasts for 2006 show overall construction will slow with an increase of 3 percent compared with the 8 percent increase seen last year. Top growth markets for the coming year include institutional, commercial and manufacturing construction.

McGraw-Hill Construction/Dodge, an economic engine that generates monthly construction starts data for the industry, predicts an overall increase of 3 percent to $654.3 billion in 2006. That’s compared with an 8 percent increase from 2004 to 2005.

One of the top markets will be public construction, namely highways and streets and educational facilities. Commercial construction is also expected to see strong growth. McGraw-Hill predicts the strongest increase though from industrial construction, with a 9 percent boost in 2006. Single-family housing and electric utilities may stay flat or even decline in 2006, according to McGraw-Hill, which predicts a 1 percent drop in both.

For housing, it will be a systematic simmering down process toward more sustainable levels of sales, production and price appreciation as opposed to a full-blown cyclical contraction,” says National Association of Home Builders Chief Economist David Seiders. “In terms of single-family sales and starts, we’ll basically be retracing the increases we saw in 2005, heading back to 2004’s very healthy levels.”

Seiders predicts overall housing starts to reach 1.94 million units this year, down from 2.06 million in 2005 but close to 2004’s 1.95 million units. Single-family starts will decline to 1.59 million next year from this year’s 1.71 million, while sales of new single-family homes will ease to about 1.19 million units from this year’s 1.27 million. Likewise, multifamily starts will slip to 350,000 in 2006 from about 354,000 in 2005. The condo market is expected to cool slightly; as a result, the rental side of the market will gain more ground.

Seiders expects the pace of home price appreciation to be cut in half over the next year, from an estimated average of 10.7 percent for 2005 to 6.5 percent in 2006, and even lower to 4.4 percent in 2007.

AGC economist Ken Simonson noted trends in other areas of construction:

  • Health care and lodging will do better in 2006 compared with recent months.
  • Retail may see selective growth again.
  • Alternative energy facilities may see a boom.
  • Electric power plant construction may not pick up again until 2007.
  • The office construction market will not pick up again until late 2006.

The Associated General Contractors of America reports that the passage of more federal aid for highways and streets should result in more public construction in the coming year. But higher material costs may slow that construction somewhat because “each dollar buys less construction,” according to AGC.

Oil prices have been coming down but they are still higher than a year ago; cement makers have announced price increases as of the start of this year, on top of a 13 percent increase in the past 12 months; and gypsum, which has risen in price at double-digit rates for two years, should level off or drop in 2006.

Simonson says he expects the cost of fuel, asphalt and plastics including PVC pipe to average 10-20 percent higher than in 2005 because of high petroleum and natural gas costs. Copper prices also remain high.

JP Morgan Chase Senior Economist James Glassman called the economic outlook for 2006 “growth without the steroids.” Conditions will be good without the benefit of tax cuts or cuts in interest rates by the Federal Reserve, he says. He sees core inflation remaining relatively tame in 2006, at between 1.75 percent and 2 percent.

“The next several years should present a good backdrop for growth with low inflation,” he says. “It looks to me like a pretty good if not boomy’ outlook for the housing sector.”

The effect of Hurricanes Katrina and Rita on the housing sector may be delayed until the completion of debris removal, demolition, infrastructure strengthening, and land-use and financing decisions. But families displaced by Katrina may add to demand for housing in the Southern region, AGC reports. – Lindsay Young

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