Construction Cooling: Residential building is the weakest link

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Moturi Kenwell?s small trucking business has made no profit since he started hauling building materials across the country more than a year ago. A beefy, gregarious man with an easy smile, the 40-year-old resident of New York City?s Queens borough is cautiously optimistic that he would break even within the next year.

Construction industry experts aren?t so sure. ?The business has cooled off, though the bottom hasn?t fallen,? says Richard Korman, managing senior editor for ENR.com, a McGraw-Hill online publication that covers the construction industry. ?It?s pretty gone with the rest of the economy.?

Among other problems, the construction industry is struggling with inflation and a lack of credit. The cost of energy, steel and other building materials are rising faster than in previous years, while credit is getting hard to come by, delaying various construction projects, especially home building, which accounts for about 30 percent of the industry?s spending. That explains why total construction spending for the first four months of 2008 fell 17 percent to $170.4 billion year-on-year, according to a recent report by McGraw-Hill Construction, an industry research firm.

Within the industry, residential building was the weakest link, falling 39 percent, thanks to a tight credit market, the report says. In April alone, single-family housing spending extended the downward trend that has been under way for more than two years, falling 6 percent from March levels in the South Atlantic, 2 percent in the West Coast, and 1 percent in the South Central. The Northeast, however, saw a spike of 3 percent, while the Midwest rose 4 percent. Multifamily housing spending rose 3 percent, boosted by the start of four large projects located in Chicago at a combined cost of $132 million and other projects in Port Washington, N.Y., costing $101 million, adds the report.

Similarly, spending in commercial construction category fell, especially store expansion, which fell 8 percent, and hotel projects, which dipped 5 percent. The store category is particularly vulnerable this year, as retailers pull back on expansion in the face of tighter credit conditions and weaker consumer spending, says Robert Murray, an analyst at McGraw-Hill Construction.

A drop in industry spending has already led to massive job cuts, affecting mostly African-Americans who form the majority of blue-collar workers at construction sites all across the nation, says Wayne Crew, executive director for the Construction Industry Institute, a research center at the University of Texas at Austin. In the latest job report from the U.S. Labor Department, the overall unemployment rate surged to 5.5 percent in May from 5 percent, the largest monthly spike in more than two decades, as the economy shed 49,000 jobs for a fifth month of decline. The construction sector again led the way down, shedding 34,000 more jobs in May.

But there are hopeful signs for the industry as a whole, although it might take some time. Warehouse construction in April edged up 1 percent, while manufacturing plant construction jumped 63 percent after a very weak March, after two large ethanol plants with a combined budget of $180 million broke ground in North Carolina and Indiana. ?While tighter lending standards are raising concern about the prospects for commercial building, publicly financed construction is expected to hold up relatively well during 2008,? Murray says. ?The strength shown by the public works categories in April, along with the elevated activity for several institutional structure types, supports this belief.?

Spending for nonbuilding construction in April jumped 28 percent to $162.4 billion, reflecting gains for both public works (up 24 percent) and electric utilities (up 41 percent), according to the McGraw-Hill report. Of the public works categories, the largest increase was for water-supply systems, which rose by 167 percent. The boost to the water-supply category was provided by, among others, the start of a $1.3 billion water treatment plant in Westchester County, New York. Meanwhile, after a very strong March, sewer construction in April edged up an additional 2 percent, helped by the start of a $278 million water-pollution control project in Brooklyn, N.Y.