The freezing of credit markets, combined with sharply reduced expectations for the economy, are drastically lowering the number of construction starts. At the same time, the slowing world economy, along with a rebound in the value of the dollar against some currencies, has driven down many materials prices.

Contractors nationwide have reported in the past two months that developers have deferred projects, either because they can’t line up bank financing or they no longer expect to find tenants once an office, hotel, store or warehouse is completed. Meanwhile, as much as $100 billion of municipal bond issues have been postponed or cancelled because of turmoil in the credit markets. That has hurt contractors expecting to bid on highways, schools and public works.

The massive intervention by the Treasury and Federal Reserve in the credit markets should unlock bank lending and bond markets in the next few weeks. But the availability of credit is no guarantee that borrowers will rush to take out loans again. Indeed, states are likely to cut back their construction activity, whether financed by bonds or direct spending. Last week, the Center on Budget and Policy Priorities reported that preliminary third-quarter revenue estimates from 15 states “raise the likelihood that large, additional budget shortfalls are developing."

Congress appears poised to pass a fiscal stimulus package that includes infrastructure spending. Whether it is enacted in a lame-duck session in November or after a new President is sworn in next January remains to be seen. But enactment should provide a small boost to construction by the second quarter of 2009.

A few other construction categories should also hold up reasonably well. The “continuing resolution” that Congress passed in September keeps most federal spending at 2008 levels through early March but boosts spending for base realignment and other military construction, veterans’ hospitals, and homeland security projects. On the private side, power plants, transmission lines, wind farms and refineries appear to be moving ahead.

Contractors who still have reason to buy materials should find many prices dropping. The futures price for oil and copper last week dipped below year-ago levels. Diesel fuel should likewise soon fall below year-ago prices. Asphalt prices are dropping also, though not as sharply. Scrap steel prices have tumbled. Steel makers have tried not to lower their selling prices in tandem with the scrap decline, but the strengthening of the dollar against the euro and weakening foreign demand for steel should mean the availability of foreign steel will soon push down domestic steel prices. Gypsum, cement and concrete makers have posted or announced large price increases in recent months but may have to back down.

For 2008, I expect nonresidential construction spending to rise 6-11 percent compared to 2007. But much of that dollar increase will be eaten up by material cost increases of 7-10 percent and labor cost hikes of 5-6 percent. For 2009, I predict nonresidential spending will drop by 3-9 percent; materials costs will be down 1-5 percent, depending on the mix of inputs for a given project; and labor costs will rise 3-4.5 percent.

To report your recent experience with demand for projects or materials prices, or to receive The Data DIGest, a weekly one-page summary of economic news relevant to construction, write to simonsonk@agc.org.

The producer price index (PPI) for finished goods fell 0.1%, seasonally adjusted, in September but rose 8.7% over 12 months, the Bureau of Labor Statistics reported on October 15. The PPI for inputs to construction industries, a weighted average of all materials used in every type of cosntruction plus items consumed by contractors (such as diesel fuel), rose 0.5% for the month and 13% over 12 months. Once again, the largest increases by construction type were for inputs to highway and street construction, 0.7% and 22%; followed by other heavy construction, 0.2% and 17%; nonresidential building, 0.5% and 12.5%; multi-unit residential, 0.5% and 9.6%; and single-unit residential, 0.7% and 9.2%. PPIs for finished buildings generally rose less, suggesting that margins for contractors have narrowed. The index for new industrial buildings was flat for the month and up 4.9% over 12 months; warehouses, -0.2% and 4.2%; offices, 0.1% and 3.7%; and schools, 5.8% and 8.2%. PPIs for major inputs diverged greatly. The PPI for copper and brass mill shapes tumbled 9% for the month and 2.9% over 12 months; steel mill products plunged 3.6% in September but was 38% higher than a year before; diesel fuel, -1.4% and 39%; and asphalt paving mixtures and blocks, 3.1% and 51%.

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AGC's Chief Economist, Ken Simonson, appeared October 24 on Fox Business to discuss the state of transportation infrastructure.  Watch the video here.

AGC has compiled tables of PPIs for construction materials and segments as well as analysis. The data is from the Bureau of Labor Statistics monthly report and covers over 50 construction specific data series.

The Emergency Economic Stabilization Act passed the House, 263-171, today and President Bush signed it into law immediately. The bill authorizes the Treasury to buy up to $700 billion of mortgages and other assets affecting the balance sheets of financial institutions. AGC members sent more than 4,000 letters, emails and calls, overwhelmingly in support of quick action. Data DIGest readers had reported many cases of projects stopped because credit was unavailable. If signed, the bill should help private, state and local borrowers regain access to credit markets for construction. The Senate added a slew of tax provisions that were included in the final bill and should help specific types of construction, including extension of wind and other alternative energy production tax credits; 15-year depreciation for leasehold, retail and restaurant improvements; and numerous preferences for specific locations or property types.

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The upheaval on Wall Street is delaying or stopping projects all over the country, even ones already under way. Developers who had lined up construction loans from Lehman Brothers have found the check wasn’t in the mail this month, forcing contractors to front the money—if they can find it—or walk off the job. For projects that contractors expected to start this fall, the developers are finding the lending window has been shut for now, or the revenue assumptions for the finished development no longer look valid.

Public projects and institutions such as hospitals and universities may not have the same credit difficulties, but their funds have also taken a hit. Many states are dialing back their forecasts for income and sales tax revenues while increasing their projections for social welfare spending. That combination, along with a requirement that their budget be balanced in a fiscal year that typically ends just nine months from now, means construction projects will be delayed, scaled back or canceled.

Institutions that had counted on endowments or pledges from wealthy donors may find their portfolios have shrunk too much to proceed with planned projects. Putting the economic engine back in gear may not be easy. Banks and other lenders that have suffered losses directly on mortgages may be able to sell those to the government, depending what sort of rescue package is implemented. (At this writing, nothing has been enacted.) But they are unlikely to recoup losses incurred on many indirect investments and may have to reduce their lending until they attract more capital.

State and local revenues will not bounce back right away, although a “stimulus” package that appropriates funds for public works could resuscitate construction. The best chance for recovery is if housing revives. Although figures on permits, starts and sales in August were dismal, the inventory of unsold new homes has shrunk substantially. If the lending window for mortgages reopens, there could be a rapid upturn in home sales. That would quickly spur other consumer spending and would bring single-family home construction back to life by the second half of 2009 in some parts of the country. Property tax receipts would then turn up, helping school districts and other local governments.

To report impacts that your firm has experienced from the credit market turmoil or to request a file of reports from others, email simonsonk@agc.org. State your line of business and territory, and whether you are willing to be identified. Replies will be kept anonymous unless permission to share identification is granted.