By Jim Haughey, Reed Construction DataApril construction starts slipped 3% from the previous month after March starts were revised up nearly 7%. The preliminary April total includes residential starts estimated as the average of the latest three months pending hard data from the Census Bureau. A certain upward revision for residential will put April starts broadly stable with March. This is consistent with the expected starts trend this spring.
Starts are clearly above the cyclical low point last summer, but have weakened slightly since the initial rebound last July and August. The improvement in the single-family market in the last ten months has been a little more than offset by declines in heavy and non-residential building work, especially commercial projects.
The improvement in the single-family market has resumed during the spring, although this market will remain below trend for at least two more years. The decline in other construction sectors will slow. Overall, starts are expected to stabilize during the summer, turn up in the fall and then rise progressively, but modestly, in 2011.
In the non-residential building sector, high and still slowly rising vacancy rates will cause a further small slippage in commercial starts until later in the year. The collapse of state and local budget positions will overwhelm stimulus funding for buildings and cause a little more decline in institutional starts this year. It will also prevent significant improvement next year. The biggest risk of further decline is for K-12 schools and municipal buildings. Property tax receipts are still falling, while income and sales tax receipts are now turning up.
The squeeze on contractors’ margins will worsen before beginning to improve about at year end. Materials costs are rising at a double-digit pace so far this year, mostly for imported commodities in a strengthening world economy. Bid prices are still weakening due to intense competition for work.
The expected turnabout to rising starts later this year will be driven by the improving economy. This includes higher, but still depressed, consumer and business confidence, higher consumer real incomes, more commercial mortgage funds from speculative investors (i.e., sensing that asset prices are near the bottom), funds from pump-priming public works programs and well financed enterprises investing at the low point in the construction cost cycle. The Federal Reserve Board will accommodate this turnaround with continued very simulative monetary policies.