Construction Activity Seems To Have Peaked - Business Outlook
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Construction Activity Seems To Have Peaked

Written By: ELI LUSTGARTEN

Article Date: 09-04-2006
Copyright(C) 2008 Associated Equipment Distributors. All Rights Reserved.


Demand for medium and heavier equipment should remain in high demand.

Enjoy the summer! That's the best advice that can be given to anyone in the construction sector as it's likely current activity is the best the industry will see for a while. It's not that construction activity will wane dramatically. What is expected is that this is virtually the last time activity across all markets will be so robust.

Our summer survey trends continue positive for near-term demand, driven by solid non-residential construction markets, industrial, and infrastructure projects, which one would expect at seasonal peak levels of construction activity. Ongoing residential projects remain a secondary driver of light and medium-duty construction equipment demand.

Most popular products in the equipment rental market remain aerialwork platforms and boom lifts, skid-steer loaders, track loaders, compressors, backhoes and heavy earthmoving equipment. Anecdotal evidence suggests that larger, as well as some lighter-duty, equipment, such as aerialwork platforms, continue to be in tight supply.

However, the second quarter economic data clearly shows the expected slowdown has arrived. Real GDP growth was reported at 2.5 percent for Q2:06, down significantly from the restated robust 5.6 percent in Q1 and below most projections.

While a much slower expansion of capital spending, and an unexpected 3.4 percent decline in Federal spending caused the shortfall, the retail sales and job data show the economy lost momentum during the quarter.

The outlook for the second half of 2006 is likely similar to Q2's pace.

Recent government construction data on "Construction Put in Place" reported a sequential monthly 0.3 percent gain in June after a revised 0.1 percent decline in May, following a 0.2 percent gain in April. Construction activity is still 8.6 percent above 2005.

Private residential construction sequentially declined 1 percent in June from May, down 1.4 percent in May (revised), down 0.8 percent in April, but is still up 6 percent year-to-date.

Non-residential construction was up a seasonally adjusted 2.7 percent in June, up 1.6 percent in May and 2.2 percent in April; activity is about 21 percent over the same period last year with every category of non-residential construction being up.

Public construction was up 0.8 percent in June and a revised 1.6 percent in May and up 10 percent year-to-date.

While the most recent data is somewhat confusing, it underscores the transition that is beginning to occur in the construction markets away from residential and lighter construction and toward non-residential and heavier construction sectors for the second half of 2006 and 2007. Public construction remains strong near-term but funding issues will likely continue to plague spending patterns.

To no one's great surprise, the three successive month decline of private residential construction is likely
to be the pattern for the rest of the year, according to the latest surveys by various construction and contractor trade groups. The latest data shows housing starts are down 2.5 percent in July to a 1.795 million rate, and permits fell 6.5 percent to the lowest rate since September 1999. Mortgage rates are up, housing inventory continues to rise, and house prices appear to be softening across the country. Private residential construction is likely to further weaken as builders work through the backlog of sold but not yet built homes.


Private non-residential construction appears to have the momentum to take over for the residential sector and carry construction activity for the remainder of 2006 and 2007. Leading the way will likely be projects in manufacturing (up 25 percent YTD), hospitals (up 27 percent), and commercial construction (up 10 percent) led by shopping centers (up 55 percent), commercial warehouses (up 17 percent) and resorts and hotels (up 30 percent), as well as mining, energy and power construction in 2007. The only weak areas appear to be retail categories, such as auto dealers and food and beverage establishments.

The outlook for public construction is less clear. Current activity is strong with the two largest sectors leading the way - highway and street activity is up 15 percent and educational construction is up 7.5 percent YTD. However, contractors are worried future activity may slow as more agencies find that their budgets will not cover the leap in construction costs. More projects are likely to be postponed or redesigned as costs for paving materials, metals and plastics keep rising at double-digit rates.

The bottom-line is that construction activity growth is expected to slow to mid single-digit rates over the next year with the non-residential and heavier construction sectors key growth drivers. This suggests a potential weakening of demand for lighter construction equipment over the next 12 months though demand for medium and heavier equipment should remain in high demand.



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