Plumbing and Mechanical

October construction starts rise but firms list mixed plans; bond, ballot issues win big

November 15, 2006
Reed Construction Data announced that the value of nonresidential construction starts in its database for January-October 2006 totaled 8.6% higher than in the first 10 months of 2005. Allowing for construction cost inflation, the real volume of new starts has increased about 2% so far in 2006 compared to the same period in 2005, Reed Chief Economist Jim Haughey estimated. “The record-high October starts were 7% higher than a year ago and 23% above September….Hotels, amusement and recreation facilities, hospitals and nursing homes, laboratories and bridges continue to be the fastest-growing construction sectors in 2006. Large monthly increases from September were also recorded for warehouses, library and museum buildings and highway, road, water, sewer and other civil projects. October starts for non-building projects were 45% higher than the average for the first nine months of 2006. The huge October gain is not sustainable. It was partly due to normal seasonal improvement and partly due to the return of projects delayed during the spring and summer, now that costs have stopped rising for cement, asphalt and structural steel and have fallen for aggregates. The office market continues to lag the rest of commercial construction, due to high vacancy rates in most major markets. October starts fell 24% from an unusually high September total and are up only 7% year to date compared to the same period in 2005.”

Companies have made varied announcements about construction and other capital spending plans recently. USA Today reported, “State regulators gave approval to Nevada's electric utilities to develop the largest power plant in the state and 250 miles of transmission…a $3.7 billion project…” The Wall Street Journal reported, “Home Depot is spending $350 million on its stores…Lowe's meanwhile, already has invested a lot of money on remodeling its stores and increased staff. Danielle Fox, retail analyst at Merrill Lynch, thinks Lowe's…is going to significantly pare back expenses going forward.” Another Journal story reported, “Bucyrus International Inc., a maker of huge mining machines in South Milwaukee, Wisconsin, says it is on track to spend $135 million this year and next on [factory] expansions, and sees no reason to cut back. [Wal-Mart Stores Inc.] said recently it was responding to a slowdown in the rate of sales growth by cutting spending on new stores and distribution centers. Wal-Mart's capital spending will grow between 2% and 4% next year, the company said, down sharply from the 15% to 20% increase this year. Similarly, Intel Corp….has said it will trim $1 billion in capital spending as part of broader cost cuts….Amazon.com Inc. [last month] said it was slowing its rate of investment in new projects.”

“State and local governments won approval for more than 88% of the $78.6 billion [in bond issues] they asked to borrow in Tuesday's election, according to i-Deal, a New York company that tracked the results,” USA Today reported. “California voters approved the biggest chunk of debt: $443 billion for five bond issues for roads, schools, flood control, parks and affordable housing….Big bond issues approved elsewhere: Wake County, North Carolina…$970 million to build 17 schools, buy land for 13 others and improve another 100 buildings in the county, which includes Raleigh. Dallas…$1.4 billion for parks, streets and libraries….The Hartford, Connecticut, area…$800 million to start a massive sewer upgrade…The biggest bond issue to fail: Los Angeles' proposal to borrow $1 billion to build affordable housing.”

Construction was a winner in several other ballot measures as well. “Arizona voters endorsed a higher cap on the amount of debt cities may take on, with local voter approval, to enhance public infrastructure and transportation to accommodate sustained rapid population growth and economic development,” the BNA Daily Report for Executives reported. “And voters in Minnesota and California acted to prevent state lawmakers from raiding transportation funds to fill budget gaps, or at least to force the restoration of money diverted for other purposes….New Jersey voters approved…a constitutional amendment dedicating a larger share of state motor fuels tax revenue to fund transprotation projects beginning in the 2007-2008 fiscal year.” New Mexico voters approved creation of a water trust fund but did not specify a financing mechanism. AGC chapters were leading supporters of many of these bond and ballot measures.

According to Federal Reserve Bank of San Francisco (FRBSF) Senior Economist Mark Doms and Research Associate Meryl Motika in “The Rise in Homeownership” (FRBSF Economic Letter, www.sf.frb.org, Nov. 3): “The homeownership rate in the United States increased steadily and sharply from 1994 to 2004. A portion of the increase may be due to the aging of the population, but increases in homeownership rates are widespread across many demographic groups, so one must look beyond demographic trends to explain the increase….some of the explanation likely stems from innovations in the mortgage market that resulted in greater access to credit, lower down payment requirements, and easy and low-cost access to the equity in a house, which makes homeownership more attractive.” These changes have mixed implications for rental construction.