Indicators, like steel prices, up

Vermont Business Magazine, Apr 01, 2004 by Barna, Ed

There are ifs and maybes in the picture, but a large number of observers feel this might be the year for a perfect storm of construction.

The combination of the effect of federal tax cuts, confidence in the economy during an election year, low interest rates, concern about those rates not lasting indefinitely, and pent-up demand seem to be moving plans off shelves and projects into the permit process.

If that process is simplified by legislative action, that's even better; and if federal and state legislators fulfill the early hopes of those seeking to rebuild transportation infrastructure, it could be a memorable year for work on highways and bridges.

On the residential front (see related article), the demand for housing, both from residents and people seeking to relocate to Vermont, has helped to create a feverish market characterized by rising prices, low inventory, problems finding build-able sites, and a serious crisis in affordable housing. But even without a huge burst of new construction, there has been a boom both in remodeling and in the creation of in-fill housing units.

The clouds on the horizon include such possibilities as economic shocks from terrorism, and a surge in interest rates related to the declining value of the dollar and the need to attract foreign investors. Less obviously noted is the growing Chinese dominance of the steel market, which has sent the Prices of both scrap metal and finished goods soaring, with all sorts of implications for construction., prices (structural, rebar, tools, etc). And long-term, there is concern that younger workers still aren't choosing construction careers in adequate numbers, so that the average age of a construction worker has, by one tally, risen to 53.

That said, the bullish predictions are nevertheless coming from a variety of quarters: economists, construction company heads, architects, and other observers. And it seems to be backed by preliminary indications that Vermont has seen a better jobs recovery than many other parts of the country.

Contract-ing, Not Contracting

To Dick Heaps, publisher of the Vermont Economy Newsletter, the overall situation looks "very good." Employment is the one aspect not pushing ahead, but "everyone expects it to pick up."

Perhaps it has in the contract construction area. According to Department of Employment and Training estimates, there were 13,950 jobs in that industry in January of 2004, compared with 13,000 for the same month in 2003 - a 7.3 percent gain. And as anyone who lived through the extreme snow then the extreme cold of the winter of 2003-2004 can testify, unusually good weather conditions weren't the reason.

Interest rates, a key to construction activity, are expected to increase, but should hold through this summer, Heaps said. They especially affect residential construction, and in that regard, "It looks like residential (construction) will be not much different than last year, which was quite good."

The appreciation in real estate values has let people refinance at attractive rates and use the money either to cope with consumer debt or improve the residences themselves, he said, so he is not concerned about the level of consumer indebtedness as a negative factor.

Jeffrey Carr of Economic and Policy Resources in South Burlington said the federal budgetary situation helped but boost economic activity, including construction. Where there had been a $250 billion surplus, the budget is looking at about a $500 billion deficit.

"Three-quarters of a trillion bucks is a lot of money. That's a huge stimulus," he said. In the long run, Carr has concerns that "we're living on borrowed time."

The federal funds rate of 1.5-2 percent is lower than the rate of inflation, a negative rate, and "how much longer can it stay that way? Probably until after the election, but after that, watch out."

On the other hand, negative predictions keep getting proven wrong, as consumers keep refinancing and spending, Carr said. About 18 months ago, motor vehicle sales reached the 15 million mark, and he predicted that would be the height, no way would they go above it. "They're 16 million now," he said.

"I think we're going to see a turnaround," said Jo Bradley, executive director of the Vermont Economic Development Authority. "I think we're seeing it already, quite frankly."

That sense of direction comes from anecdotal evidence, such as the number of applications coming in for VEDA loans.

"We are just right-out straight," Bradley said. Their business lending includes commercial, residential and industrial financing, and all those sectors are represented, including some proposed manufacturing expansions.

A new program that seeks to help finance technical infrastructure development is taking off, Bradley said. Connectivity is one key to bringing all of Vermont into the electronic mainstream, and their assistance can be an incentive to aggregate demand, she said. Equipping incubator buildings would be an example.

In their annual report for the fiscal year ending June 30, their 29th, VEDA reported that they had approved financing commitments to 120 businesses totaling $52.5 million, up over 47 percent from the previous period - the second-largest dollar volume in their history. That did not include approving over $15.2 million in industrial revenue bonds, and being a participatory lender in $122 million worth of projects.