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Economists forecast strong growth in U.S. non-residential construction for 2008

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by Richard Gilbert

The non-residential construction sector in the U.S. will experience strong growth in 2008, despite the heavy drag coming from the decline of the residential construction market, says a panel of construction economists south of the border.

The non-residential construction sector in the U.S. will experience strong growth in 2008, despite the heavy drag coming from the decline of the residential construction market, says a panel of construction economists south of the border.

The Associated General Contractors (AGC) of America produced their 3rd Annual Economic Forecast on Dec. 13 to discuss the direction of the U.S. construction industry in 2008. The 90 minute audio conference featured three experts on construction economics, who assessed the impact of the downswing in residential construction on the construction sector and the economy.

“The housing market has been extremely weak this year,” said Daryl Delano, principal and chief economist at Delano Data Insights.

“There was an extraordinary decline, with residential construction down 17 per cent and housing starts falling by 25 per cent.”

He explained that the decline in residential construction caused an overall decline in total construction spending of around two to three per cent.

“This is the first downturn in overall construction spending since 1991,” he said.

According to Delano, in 1991 both residential and non-residential construction declined. There is more strength in the construction sector than the last severe downturn, because this year construction is better on the non-residential side.

“The non-residential sector has been relatively impervious to what is happening in the housing market,” said Ken Simonson, chief economist with the AGC of America.

“Non-residential construction will continue to be in positive territory next year, but will not have the same growth as 2007.”

Simonson predicted that non-residential construction will increase by three to seven per cent in 2008.

Delano predicted that non-residential construction will increase by about seven per cent.

However, this prediction represents a significant drop, since non-residential construction grew by 14.5 per cent in 2007 and 12.3 per cent in 2006. Simonson explained there are sixteen categories of non-residential construction that are all experiencing double digit growth in current dollars (including inflation).

The only category that is not up is the construction of religious buildings, which is closely linked to housing construction.

Both Simonson and Delano agreed that institutional construction, in particular hospitals and educational facilities, will grow next year.

Construction work will continue in new and existing hospitals as new technologies are being implemented.

The construction of educational facilities is being driven by university endowments and demographics.

“The energy and power sector is in a building boom that is just starting to take off right now,” said Simonson.

“We will see several years of growth in refineries and retrofitting.”

Growth in this sector will also include adding capacity at power plants and the construction of wind farms, that need to be linked up to the grid by the construction of transmission lines.

Simonson and Delano also agreed that commercial construction will experience much smaller growth rates in 2008.

In particular, Delano said hotel and casino construction could not sustain past growth rates of up to 60 per cent.

He also said infrastructure construction will do well in 2008.

The panel of experts, which also included John Cross, vice president of marketing with the American Institute of Steel Construction, said that the negative effects of the collapse in residential construction have not completely spilled over to non-residential construction.

The panel members agreed there has been some spillover already, with the tightening of credit availability, which has caused some projects to be cancelled or put on hold.

They also said they believe some projects in the planning stage won’t go ahead, because of a lack of confidence in credit.

The panel said that the strong action taken by the Federal Reserve to avoid a liquidity crisis is one of the key factors that will facilitate the growth of non-residential construction in 2008.

Delano said he believes that the U.S. economy is through the worst of the sub-prime mortgage crisis.

However, Simonson said there is no way of knowing if the worst effects of the crisis are over. So, there is the looming possibility that lending standards in non-residential construction will also start to tighten up.

He said new construction orders are coming in more slowly and it is necessary to apply to three or four different banks to get financing lined up.

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