Construction slowing

By Alan M. Gayle Vice President & Chief Economist Crestar Bank

HIS has not been a particularly good year for the construction industry despite a continuation of the longest peace-time economic expansion, and a resurgence in business investment. Few measures of construction activity have even managed to keep pace with 1987 growth rates, and most indicators have fallen behind last year's levels. With slower economic growth being the consensus outlook for 1989 (highlighted by a weak consumer), the construction industry is likely to face yet another difficult year.

The economy through most of 1988 has grown at an above average pace, thanks to strong improvement in the trade deficit and a surge in business investment. Consumer spending has held firm through much of the year, with the only apparent weakness emerging in the early fall. Steady gains in employment generated a steady increase in income, and with the unemployment rate at or near a 14 year low, consumer confidence ran at a high, steady level.

Story at a Glance

Another difficult year. . flat growth, over supply, continued high interest rates. slowdown likely even in hot building areas.

Businesses have enjoyed strong orders for new output, paced by increasing export demand. The level of capacity utilization has risen steadily during the period, particularly in dollar sensitive areas such as chemicals. This has prompted high investment in equipment for productivity, which in itself adds to growth. In the foreign sector, the decline in the value of the dollar since early 1985 apparently came to an end, as the trade deficit made a long slow turn upward. Taken as a whole, therefore, the economy has performed remarkably well in the wake of last October's stock market crash.

Unfortunately, the construction industry has not fully shared in this general economic prosperity, and the prospects for 1989 look no better. Rising interest rates from the Federal Reserve, Tax Reform disincentives from Congress and a near glut of unfilled oflice space have created an uninviting environment for construction that is likely to carry over into the coming year.

That is not to say that all regions and cities will experience poor construction activity. The Washington, D.C. area is one ofthe hottest sections ofthe country for new building, and 1989 should be no different. However, some slowing from the torrid pace of the past several years is likely. Unfortunately, other areas have used the extended period of relatively low interest rates (since 1984) to over-build, and there are currently a number of commercial buildings on the auction block.

As a result, the outlook for construction activity in the Southeast is not encouraging for the coming year. General projections of economic slowdown and continued high real interest rates, combined with over-supply mean an unattractive market for many builders. While a major falloff in this sector is considered to be only a small risk, growth in many areas will be flat, and contractors will have to wait, and hope for a stronger market in 1990.