In a closely watched report expected to be released today, McGraw-Hill Construction will forecast that spending on commercial and manufacturing buildings, such as offices, warehouses and hotels, will decline 7% next year, in dollar volume, and 10% in the number of square feet of space built. That would be a sharp turnaround from this year, when commercial and manufacturing construction is expected to end the year up 11% in dollar volume.
The McGraw-Hill forecast is based on the company's tracking of construction projects, including the issuance of building-permit data by local governments. That data, known as construction starts, are an indicator of future construction spending and often correlate strongly with actual construction spending.
The strength in the commercial sector until now had been offsetting the decline in the housing market. That appears to be changing, though continued growth in institutional construction, such as universities and hospitals, and road construction will provide somewhat of a balance. The pattern of having one sector up while the others were down "has been a moderating force," says Robert A. Murray, vice president for economic affairs at McGraw-Hill Construction, a unit of McGraw-Hill Cos., a New York-based publisher. (Please see related story.)
This is a very important story. Here's why.
According to the Census Bureau, from August 2006 to August 2007, residential construction spending decreased from $631 billion to $529 billion, or a decrease of $102 billion. Over the same time, nonresidential construction has increased from $555 billion to $637, or $82 billion. Nonresidential construction has increased from 46.79% of total construction spending in August 2006 to 54.54% in August 2007. In other words, nonresidential construction has really helped to limit the negative impact of the declining housing market.
If that total slows down then 2008 could be an incredibly ugly year.
