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Stimulus Impact on Construction Begins in April
7.22.2009 | -- admin
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The $787 billion economic stimulus plan will begin to impact the construction market in April. The added federal spending is about 1-1.5% of GDP in 2009, which is only enough to reduce the severity of the recession. GDP is likely dropping at a 4-5% annual pace in the current quarter, and will still be declining faster than a 1% pace through the summer.
While a second round of stimulus spending is being discussed in Washington, the economy and the construction market is expected to work through the inventory cycle and be expanding by the end of the year. The stimulus spending may shorten the recession by a month, but much of the spending will be absorbed to offset the panic created in the economy to build the support to enact the stimulus plan. Spending is spending in the short-term, so the net result is slightly positive but comes at the cost of a deep recession.
Nonetheless, it has been done. Here is what to expect as monthly spending from the stimulus plan progressively increases throughout the year. The impact on construction will be via three tracks. The most obvious one is the $130 billion direct funding of construction projects. States have now received permission to obligate $26.7 billion for highway projects including $8 billion they must pass on to local governments, which will select their own projects.
A few small road projects will be underway in April, but the time needed for project selection and bid preparations will keep job site spending minimal until into the summer. Most of the remaining $100 billion of construction funds is for specific federal building projects or will be allocated after a long application and review process. So this money will be spent with at least a 3-6 month delay behind highway project spending.
Only asphalt has a significant price increase risk from this new spending. Repaving is the most shovel-ready type of project. Asphalt prices have plunged in recent months but could be rising rapidly again possibly doubling by the end of the summer.
The second track is the indirect impact of the $657 billion non-construction stimulus money. This spending begins in April with lower tax withholding rates for low income wage earners as well as expanded benefits and eligibility for food stamps and unemployment benefits. The hiring process for tens of thousands of new federal employees has already begun. And hiring or layoff deferrals for state and local government employees also begins in April.
Spending will ramp up more quickly for the non-construction programs than for the construction programs. However, much of the non-construction funds are reserved until the next fiscal year beginning on October 1st. This spending will stimulate additional private spending and hence boost demand for private building space. The Reed Construction Data forecast anticipates no significant impact on private construction demand until summer, and then a progressively positive impact through 2010. Housing will see the largest initial impact as people who regain jobs are better able to keep their homes or move out of multi-family households into their own homes or apartments. No significant price impact for construction materials from this added spending is expected in 2009. However, expect a return to at least modest materials price inflation early in 2010 and more serious price inflation by the end of the 2010.
The third track is the impact of the stimulus plan on consumer and business buying confidence, which are both now at a record low level. Depressed confidence is primarily responsible for the exaggerated depth of this recession. The first confidence data for March suggests that the confidence level has stabilized. Expect a slow but progressive improvement in confidence for the rest of 2009.
The confidence improvement will come in part from the reports of hiring to work on stimulus projects as well as a subtle shift in the message from Washington. The threats of an open-ended recession before the stimulus plan was passed are now shifting to promises of great improvement in the economy soon ahead. President Obama will shortly be focusing on the good news instead of the bad news. Confidence improvement will also come from the massive credit creation by the Federal Reserve Board to cover the losses from defaulted mortgages.
Do not underestimate the impact of an improvement in confidence. February auto sales fell to an annual rate of 9.1 million vehicles, about 40% short of simply maintaining the countrys stock of vehicles. Even modest confidence improvement will boost sales to a 12.0 million annual pace and require the callback of over 100,000 manufacturing workers. The impact on home sales will be similar. A rise in the consumer confidence index from 25 (February) to over 50 by the end of summer will generate more construction demand than the direct construction spending in the stimulus program.
Caution: the pending timing of the stimulus construction funds outlined above is what is practically possible in a lawsuit-free world. This large a pot of money always attracts lawsuits. Any delays due to legal changes would be over specific projects, so some regions will experience spending delays while others will not. Lawsuits are already being threatened over alleged shortcutting of environmental reviews required before bidding. Later, lawsuits are possible in any region by disappointed supporters of projects not selected or aggrieved losing bidders.
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