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Nov. 5, 2007: Nonresidential Construction Is Still Treating Economy Well

November 5, 2007
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WASHINGTON - “Nonresidential construction provided a real treat to the economy in the third quarter,” said Ken Simonson, chief economist for the Associated General Contractors of America (AGC). Simonson was commenting on the latest reports on gross domestic product and construction spending from the Commerce Department.

“Net of inflation, or real, investment in private nonresidential structures jumped 12 percent in the third quarter, the eighth straight quarter this investment category has outpaced gross domestic product growth,” Simonson remarked. “You have to go back to the mid-1950s to find another period when private nonresidential construction was so persistently robust.

“The Census Bureau’s construction spending report was even sweeter,” Simonson commented. “Private and public nonresidential construction climbed 1.8 percent for the month of September and 17 percent over the past 12 months. That was enough to overcome the 1.4 percent fall in residential spending for the month and nearly offset the 16 percent residential drop from 12 months ago.

“There was nothing scary in the nonresidential categories, even for credit-sensitive commercial types,” Simonson observed. “All 16 Census categories were up for the month, and all but religious structures were higher on both a September-over-September and a year-to-date basis.

“Over the next several months, I expect investment to slow in income-producing properties such as office, hotel, and retail structures,” Simonson stated. “But accelerating investment in energy and power projects, plus continued strength in hospital and educational construction, should keep the nonresidential totals up.

“My biggest concern is higher costs,” Simonson concluded. “Diesel prices, which affect contractors thorough use of off-road equipment, construction trucks, and fuel surcharges on delivery of materials, are 25 percent higher than a year ago and seem poised to rise further. Other materials, especially imports, are likely to accelerate as well. And construction wage rates are going up faster than for the economy as a whole. But public agencies, from transportation departments to county councils, have failed to budget enough for construction cost escalation, and instead are trimming projects.”

Publication date: 11/05/2007

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