NEW YORK — At a seasonally adjusted annual rate of $512.9 billion, new construction starts in July slipped 4 percent from a very strong June, according to McGraw-Hill Construction Dodge, a division of The McGraw-Hill Companies. Both residential and nonresidential building were down slightly, while a more significant decline was reported for nonbuilding construction. Through the first seven months of 2003, total construction activity was 1 percent below the same period a year ago.

Residential building, at $267.9 billion, was down 1 percent in July. Single-family housing held steady with the prior month, while multifamily housing fell 4 percent. The volume of single-family housing remains robust — July’s pace was 8 percent above the average for last year.

Mortgage rates did rise during July, with the 30-year fixed rate climbing to 5.9 percent by the end of the month, compared to 5.2 percent at the end of June, and August has seen a further increase to 6.3 percent. However, according to Robert A. Murray, vice president of economic affairs for McGraw-Hill Construction Dodge, the negative impact of rising mortgage rates on homebuyer demand often takes place with a lag. “In the past, when mortgage rates have begun to move upward, potential buyers who were ‘sitting on the fence’ were spurred to action. The dampening impact on demand and construction does not become apparent until several months after rates have moved upward, meaning that any slowdown for single-family housing this year is still a few months away.”

By region, July showed this pattern for residential building: the Midwest, up 1 percent; the West, no change; the South Atlantic, down 1 percent; the South Central, down 2 percent; and the Northeast, down 6 percent.

Nonresidential building in July retreated 1 percent to 154.9 billion, reflecting a mix of pluses and minuses among the various structure types. On the plus side, school construction (the largest nonresidential category by dollar volume) jumped 12 percent. Pushing the educational category upward were the start of several large senior high schools in California, Illinois, and Texas, plus a $100 million museum expansion in Washington, DC. Murray noted, “While school construction has eased back from its record high in 2001, the volume continues to be generally strong, withstanding for the moment any dampening arising from tight state fiscal conditions.”

Health care facilities rebounded 22 percent after a weak June, aided by the start of a $200 million hospital in Chicago. Warehouses, up 44 percent, also rebounded from a weak June, while hotel construction increased 54 percent with the help of a $135 million convention center-related hotel in Denver.

On the negative side, store construction slipped back 1 percent from its elevated performance of the previous two months, even with the July start of an $80 million mall in Pittsburgh. Office construction retreated 25 percent, continuing its up-and-down pattern of recent months, and once again showing that sustained improvement is at least several quarters away. The smaller institutional project types in July also showed weakening — churches, down 3 percent; public buildings (courthouses and prisons), down 19 percent; amusement-related projects, down 22 percent; and transportation terminals, down 46 percent. Manufacturing plant construction remained depressed in July, plunging 29 percent.

For the first seven months of 2003, the 1 percent decline for total construction compared to last year was due to this pattern by major sector: residential building, up 9 percent; nonresidential building, down 5 percent; and nonbuilding construction, down 15 percent. By major region, total construction in the January-July period performed as follows: the West, up 5 percent; the South Central, up 3 percent; the South Atlantic, up 2 percent; the Midwest, down 1 percent; and the Northeast, down 18 percent.

Publication date: 09/01/2003