Economists have offered producers few surprises during the second half of 2007. Raw material costs steadily rose, and residential construction remained slow. Fortunately, commercial projects kept a decent pace.

Some analysts suggested in the third quarter that the residential slump could be more severe and last longer than first expected.

As the year draws to a close, economists are now preparing producers for a slow recovery in 2008. “Particularly weak economic growth is expected the first half of 2008,” Ed Sullivan, chief economist for the Portland Cement Association (PCA), said in his fall forecast.

The housing crisis will be “deeper and more prolonged than expected, with greater adverse consequences for consumer spending and overall economic growth,” Sullivan warned. The PCA estimates there is a 9.3-month inventory, or 2.1 million single-family homes, available on the market.

“A recovery in [housing] starts, particularly in regions experiencing boom/bust conditions, is not expected to materialize until mid-2009,” he said.

“The prospects of slower economic growth combined with tighter credit conditions are likely to result in a contraction of nonresidential construction activity during 2008.”

Also, slower job creation and its drag on state revenues should result in slower public construction activity in 2009 and 2010, Sullivan added.

Ken Simonson, chief economist for the Associated General Contractors of America (AGC), had a more cautiously optimistic outlook in his fall AGC Construction Inflation Alert. “Nonresidential construction has had a banner year so far in 2007,” he said. “Spending on nearly every segment has increased compared to 2006, despite the plunge in housing.”

Simonson estimates nonresidential construction is up 10% to 15%, led by energy and power, hospitals, and lodging. “It appears the industry will continue to expand in 2008, though most likely at single digit rates.” Simonson predicts a slower growth rate of 1% to 5%.

Higher construction costs

“Estimates for many projects now being bid, especially public facilities, were prepared in 2003-2005 under the assumption that construction costs would escalate at the same rate as the consumer price index (CPI),” he said. Since then, the producer price index (PPI) has increased to more than double the CPI, which explains why some projects are now being canceled, delayed, or redesigned.