Construction

Construction Review, Nov-Dec, 1988 by Robert L. Lurensky, Patrick H. MacAuley

In 1989 the constant-dollar value of new construction put in place will decline slightly, while repair and remodeling work will increase. The number of housing starts, especially single-family homes, is expected to decrease Commercial construction will continue to decline because business investment will be weighted toward new equipment rather than structures. Public works construction will increase slightly. Foreign construction contractors are expected to increase their market share in the United States while US. contractors lose market share abroad.

The constant-dollar value of new construction put in place declined slightly in 1988 from the record set in 1987. (However, the 1988 current-dollar value of about $400 billion was a new record.) Small increases in public works construction were more than offset by declines in private construction. Although the number of housing starts fell 10 percent to 1.45 million units, the value of residential construction only decreased 2 percent because of a marked gain in average house size and an increase in home improvement spending. Public works construction increased slightly, led by strong spending for highways and schools. The lack of growth in private nonresidential construction was largely attributable to high vacancy rates for commercial buildings in most cities, as well as to the repeal of various tax benefits by the 1986 tax reform act.

In 1988, the value of new construction put in place was equal to approximately 8.4 percent of gross national product (GNP). This represents a substantial recovery from the cyclical low of 7.7 percent of GNP in 1982, but is well below the post-World-War-Il peak of 11.9 percent attained in 1966. By this measure the construction share of GNP is expected to decline in 1989 (Figure 1-1).

During the past decade, several types of construction activity that are not included in new construction data have grown rapidly. These include maintenance and repair, commercial/industrial renovation, and hazardous waste cleanup.

Construction costs increased about 2 percent between the summer of 1987 and the summer of 1988, as measured by the Census Bureau's composite construction cost index. This represents the seventh consecutive year of moderate construction cost increases. However, builders have experienced substantial cost increases for some of their inputs, notably building materials, land, and insurance. Building materials prices rose an average of 5.9 percent in 1988 (see Chapter 2, "Building Materials"). Land prices rose dramatically in some of the strongest construction markets because of market forces and antigrowth restrictions. (Land prices are not included in the construction cost index.) Insurance and bonding costs have continued to increase, although the availability of insurance appears to have improved. Labor costs have been relatively steady, with average hourly earnings of construction workers increasing about 3 percent. Nevertheless, labor costs have run up faster in some of the strongest construction markets, where labor shortages have reduced efficiency, increased overtime, and raised wage rates.

Construction industry employment rose 0.4 percent in 1988 to a record 5.1 million employees and probably would have been greater if there had not been labor shortages in some of the strongest construction markets. In addition, nearly 1.5 million people were self-employed as proprietors and working partners (Table 2). Despite the recent moderation in construction wage increases, construction remained one of the highest paying industries, as measured by average hourly earnings and average weekly earnings.

International Construction and Investment

The construction business has become increasingly internationalized during the past 15 years. US. contractors continue to be leaders in international contracting, winning $18 billion in international construction contracts in 1987. However, the US. market share abroad has declined, while foreign construction contractors are beginning to make significant inroads into the U.S. construction market. These trends are expected to continue in 1989 and for at least several years thereafter because of declining prospects in Third World markets and increasing foreign interest in the U.S. market. (For a further discussion of international construction contracting, see the final section of this chapter.)

Many of the largest foreign contractors have entered the US. construction market during the past decade, because of declining prospects in Third World markets. Most of these contractors have entered the US. market by buying American construction companies, but some of the largest ones have established branch operations in the United States. Foreignowned construction firms won $8.9 billion in US. construction contracts in 1987, 3.5 percent of all US. construction contracts that year and more than double the $3.6 billion recorded in 1982. Most of these foreign entrants are based in Japan, West Germany, the United Kingdom, and France, although nearly a dozen additional nations are represented.