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March 27, 2003

Washington’s construction forecast remains hazy

Middle East outcome likely to have an impact

By KENNETH D. SIMONSON
AGC of America

Simonson

Like the state’s economy as a whole, construction in Washington has shown a faint pulse recently after the multiple setbacks of 2000 and 2001. But the patient is still weak and a full recovery is by no means certain.

Construction employment statewide plunged by more than 11 percent from its peak in May 2000 until April 2002 before reviving slightly over the next several months.

The picture varied within the state.

In the Seattle-Bellevue-Everett area, both total nonfarm payroll employment and construction employment continued to fall in 2002, though at a slower pace than in 2001. But in Tacoma, both categories of employment rebounded sharply last year, with December’s construction employment jumping from 15,500 in 2001 to 18,100 in 2002.

At the other end of the state, Spokane’s total employment fell 1 percent from December 2001 to December 2002 after dropping more than 2 percent the year before. Separate construction figures are not available for Spokane.

There is unfortunately little basis for optimism in the near term about construction or most other sectors. Business investment worldwide has been stymied by uncertainties about the situation in Iraq and elsewhere. Consumers also are showing signs of becoming cautious. Soaring fuel prices have eaten into personal income and reduced consumers’ willingness to spend on other items. Even housing starts and housing prices are moving up less rapidly than before, although they are still advancing.

Home prices

Washington’s home prices moved up by 4.4 percent from the fourth quarter of 2001 to the same period in 2002, according to recent data on resales and refinancings compiled by the Office of Federal Housing Enterprise Oversight. That put the state in 30th place, ahead of inflation but well behind the national average of 6.9 percent. For the fourth quarter alone, Washington house prices increased just 0.3 percent, compared to the national average of 0.8 percent.

Most of the state’s metro areas experienced similar house-price increases over the year. Only Richland-Kennewick-Pasco beat the national average, with an increase of 7.1 percent. Next came Bellingham (5.9 percent), Bremerton (5.8 percent), Tacoma (4.8 percent), Olympia (4.7 percent), Seattle-Bellevue-Everett (4.5 percent), Portland-Vancouver (4.4 percent), Spokane (3.9 percent), and finally Yakima (3.6 percent). But in the fourth quarter, these rankings were nearly reversed, with Spokane leading the pack (1 percent) and Bellingham trailing (0.1 percent).

There is little basis for optimism in the near term about construction.

The continuing low mortgage rates and above-inflation appreciation should mean that owner-occupied housing starts will remain healthy.

That’s good news for some nonresidential contractors as well as homebuilders: a new subdivision requires grading and site clearing, streets and sidewalks, underground utilities, and often playing fields, schools, religious and community facilities, and retail structures.

However, rental housing, which grew as rapidly nationwide as owner-occupied housing, is likely to slump in 2003 as rising vacancy rates discourage further building.

Road construction lags

Public construction nearly matched the 7 percent national growth rate turned in by housing last year. But in 2003, the only public category that looks likely to stay hot nationally is primary and secondary school construction, which benefited from a record level of bond issues passed last November. In contrast, most other public construction is vulnerable to the budget cutting being imposed on nearly every governor and legislature.

Washington is no exception. In fact, Washington may fare worse than most states on road construction after voters resounding rejected last year’s transportation ballot measure. The slowdown in public construction is likely to last at least two years, because state revenues typically lag a recovery in the private sector and an upturn in construction lags other types of spending.

Private nonresidential construction sagged 16 percent nationally in 2002. For 2003, the drop should not be as bad but a rebound is not yet in sight. The one exception is medical-related construction: hospitals, doctor’s offices, clinics, laboratories, even drug stores.

If the situation in the Middle East can be resolved decisively and quickly, business activity should pick up promptly in the U.S. and abroad. Washington will benefit disproportionately from being a jumping-off point for both passengers and cargo to and from Asia as well as being a major producer of agricultural, natural resources and manufactured exports. It will take several months of growth in these sectors to work off the excess capacity in factories, warehouses, offices and hotels, however. Therefore, most private nonresidential construction is unlikely to pick up before late 2003.

For now, most categories of construction costs have been flat or even falling. The exceptions are energy-related costs — such as diesel fuel, asphalt and plastic pipe — and insurance of any type. Worker’s compensation, employee health care, surety bonds and builder’s liability insurance premiums have all been rising at double-digit rates.

The outlook for 2003 is for more of the same — flat prices for most materials and equipment, even higher increases for insurance, but total uncertainty regarding energy costs.

In short, the hazy outlook depends on how soon the “fog of war” lifts and whether that really is sufficient to get America and the world back to work and back to investing.

Kenneth D. Simonson is chief economist of the Associated General Contractors of America in Alexandria, Va. He has over 30 years of experience analyzing economic and policy developments and their impact on business.

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