Stimulus Is Happening But Not Much Else
April 30, 2009
Every day in recent weeks, federal and state agencies have announced new projects funded by the American Recovery and Reinvestment Act (ARRA), the "stimulus" bill. The variety, speed and totals are impressive, given that the bill was signed less than three months ago.
Unfortunately, stimulus funding is not enough to offset the continuing sharp downturn in private and state/local-funded construction. On April 29, the Bureau of Economic Analysis reported that real (net of inflation) gross domestic product fell from January through March at a precipitous 6 percent annual rate for the second straight quarter. Investment in private residential, private nonresidential and public structures each plunged at much steeper rates: -44, -33 and -17 percent, respectively.
The stimulus bill will help these categories in different ways. Public construction will get a direct boost. In addition, states will be able to avoid some budget cuts as federal aid flows to non-construction projects, and the aid for their budgets will make new bond issues easier to sell. Residential construction will pick up late this year in some markets, once the $8000 tax credit for first-time home buyers helps clear out the inventory of homes currently for sale. Eventually, private nonresidential construction will begin to come back, probably starting with retail construction (including renovation and rebranding of existing sites) in 2010. Some of the tax-credit and private-activity bond provisions in the ARRA will add slightly to demand for private construction.
Nevertheless, total nonresidential construction spending appears headed for a drop of anywhere from 3 to 9 percent in 2009 - a painful turnabout from the 11 percent increase in 2008. Tight credit conditions, as well as weak demand from most categories of owners, will hold down activity. In 2010, despite an even larger amount of stimulus money appearing as construction put in place, nonresidential construction is unlikely to do better than match the 2009 total.