The outlook for 2008 and 2009 has been revised down since the fourth quarter of 2007, and the economic indicators released in the past two months are far bleaker than in the previous months. For instance, the housing downturn and tightening credit markets remain a drag on the economy. Consumer spending, while still positive, is slowing, and the employment situation keeps worsening. The Fed continues cutting rates to stimulate the economy but inflation is becoming a threat.

Real GDP growth in the fourth quarter was 0.6 percent, according to preliminary estimates released by the Bureau of Economic Analysis. Third-quarter GDP grew at a robust 4.9 percent, according to final estimates. Growth is expected to remain slow in 2008 before picking up in 2009. Housing continues to be a huge drag on the economy as starts and home prices continue to fall.

Employment Trends
The employment situation appears to be weakening, although the unemployment rate dipped slightly to 4.8 percent. Employment decreased by 63,000 in February to 146 million following a decrease of 17,000 in January after an increase of 60,000 in December. Construction lost 39,000 jobs in February. Construction employment has fallen by 331,000 since peaking in September 2006. During this period, job losses were concentrated in residential building – 137,000 – and in residential specialty trades – 209,000 – but employment in the nonresidential components of construction changed little.

The Conference Board’s Consumer Confidence Index decreased sharply in February after decreasing in January, as well. The index is now 75.0, down from 87.3 in January. “The Consumer Confidence Index continues to lose ground and, with the exception of the Iraq War in 2003, is now at its lowest level in nearly 15 years,” says Lynn Franco, director of The Conference Board Consumer Research Center.

The weakening in consumers’ assessment of current conditions, fueled by a combination of less-than-favorable business conditions and a sharp rise in the number of consumers saying jobs are hard to get, suggests that the pace of growth in early 2008 has slowed even further. The Consumer Confidence Index is viewed as a leading indicator for consumer spending, which drives two-thirds of the U.S. economy. Decreasing consumer confidence has yet to translate into a decline in consumer spending.

Credit tightening remains an area of concern for the Fed. The Federal Reserve lowered the target federal funds rate from 5.25 percent in September to 3.0 percent at the end of January. “Financial markets remain under considerable stress, and credit has tightened further for some businesses and households,” the Fed stated. “Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets.”

The Fed expects inflation to moderate in coming quarters, but it will continue to monitor developments closely. It believes that the rate cuts should help to promote moderate growth over time and to mitigate the risks to economic activity. However, it says downside risks to growth remain and they will continue to monitor this situation, as well.

CPI is the most widely used measure of inflation and has remained low by historical standards. However, core CPI – CPI minus volatile food and energy – rose 0.3 percent on a seasonally adjusted basis in January after increasing 0.2 percent in each of the preceding nine months. This translates into an increase of 3.1 percent over the past three months, which is above the 2 percent that is the Fed’s target range. Rising general inflation plus some rising material costs could become perilous for nonresidential construction. Increases in the price of iron ore could soon translate into large increases in steel prices.

The nonresidential segments that are the most cyclical or tied to the economy will see declines in 2008 and 2009. These segments include office, commercial, religious, amusement and recreation. Lodging is the only exception as there is enough overhang from starts in 2007 that are still under construction in 2008. The decline in starts in 2008 will catch up in 2009 for a decline in put-in-place. In the office segment, vacancy rates are still historically low. However, the loss from mortgage, realtor and banking jobs has probably not been felt yet. Expect vacancy rates to rise in 2008.

A Strong Outlook
Public office buildings will remain strong and will help to mitigate some of the loss from private office buildings. The construction at Ground Zero will also help protect against deeper loss. The retail and restaurant portion of mixed-use and urban revitalization, plus new and conversion lifestyle centers, should keep the commercial segment from a steep decline. The amusement and recreation segment is usually sensitive to the economy and consumer spending.

However, overhang from several large casino projects and stadium projects will help to mitigate against loss. Several large civic and performance centers coupled with the weak dollar bringing in foreign travelers will help to prop up the segment.

The nonresidential segments that are publicly funded will fare much better. Healthcare construction will remain positive partly due to facility upgrades across the country and seismic retrofits in California. Education construction will decline in some areas of the country due to less property taxes and therefore less state revenue. However, many metropolitan statistical areas (MSAs) and school systems in several states have passed education bonds, which will help to stop growth from turning negative. Higher education will experience steady growth driven by an increase in endowments. Public safety construction will grow because of increasing inmate populations – which are rising faster than the general population growth – and an increase in fire and police stations. Homeland Security port and border work and work to increase port size to be able to accept post-Panamax-sized vessels will help to drive transportation construction. Increased airport delays will also increase construction.

Manufacturing tends to be highly cyclical. However, it will not experience decreases in 2008 and 2009 partly due to the fact that it is at a low level; its previous high from 1998 will not be surpassed until 2010. Manufacturing will also benefit from the overhang of some huge projects started in 2007. For the first time, several multibillion-dollar projects are under construction at the same time. Basic materials manufacturing will also help to prop up this segment. Increases in cement clinker capacity, refineries and steel manufacturing will contribute to these gains.

The outlook for 2008 has been revised downward as economic indicators have been declining in the past two months. The employment situation and consumer confidence continue to worsen and inflation appears to be increasing. However, there are a few bright spots in the nonresidential and nonbuilding sectors.

Heather Jones is a construction economist in the research services group at Raleigh, N.C.-based FMI Corp . She can be reached at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it