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Ugly construction industry forecast

Architecture News Record says economists expect construction to plunge this year:

The semi-annual forecast, which is compiled in conjunction with top economists, predicts that there will be an average 11.1 percent drop in non-residential construction spending in the first half of 2009. The rate is more than 10 times that of the last six months of 2008, when non-residential construction output was forecasted to dip 1.2 percent, for the first decrease in years.

In the current forecast, which includes data provided by Moody’s, FMI, Global Insight, Reed Business Information and McGraw-Hill Construction, some sectors fare far worse than others. Hotel construction, for example, could post a 20.2 percent loss, the largest in the survey, while power plants and factories might see a 11.2 percent cut.

No sector comes out unscathed, including publicly funded projects. To wit: even spending on firehouses and police stations, which are lumped under the “public safety” category, could shrink 3.5 percent. In contrast, in 2008, that sector was predicted to grow by 5.9 percent.

None of this accounts for the massive stimulus bill Obama is about to sign into law, of course. And we all know construction is just one facet of Caterpillar’s business. Perhaps the best indicator to watch is the Architecture Billings Index, which collapsed last fall.

Historically, architects’ billing numbers have been canaries in the coal mine for builders; if they go down, builders will suffer, too, about nine to 12 months later. And the numbers in this cycle don’t bode well.

The AIA’s Architecture Billings Index, which is compiled from statistics provided by firms, has hovered below 50 for 11 straight months, and anything below 50 represents a billing decrease. In November, the index hit 34.7, the lowest point in its 13-year history.

More on the American Institute of Architects at its Web site
(look for News and Press Releases)

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Tom Mangan posted at 11:18 am February 12th, 2009 |

Slight uptick in construction spending in October

Reuters reports that while the construction outlook in December was butt-ugly, it wasn’t quite as bad as it was in November.

The Architecture Billings Index rose to 36.4 in December, from 34.7 in November, according to the American Institute of Architects. Any reading below 50 indicates a decline in billings.

All the industry sectors tracked by the group remained below 50, as did all four of the geographic regions. A measure of inquiries for new projects fell to 37.7, a historic low.

“The inability to get financing for construction projects is a key reason that business conditions continue to be so poor at design firms,” AIA chief economist Kermit Baker said in a statement.

Note that while the plunge in mortgage rates caused a tidal wave of applications, I’m told over half of them are being rejected.

As yesterday’s sell-off demonstrated, the credit crises has not gone away.

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Tom Mangan posted at 6:47 am January 21st, 2009 |

Wells Fargo Construction Forecast: Ugly

Wells Fargo (my banker, incidentally) produced a nifty PDF outlining its annual survey of construction industry sentiment from the people actually doing the constructing. One of its nifty stats is its Optimism Quotient — which hit an all time low when the study was conducted in October/November 2008 in the midst of the worst market crash in 80 years.

Since many more respondents see activity decreasing than increasing
in 2009, the Wells Fargo Optimism Quotient (OQ) fell to its lowest level
ever at 42 – down from 80 in last year’s Forecast and continuing a fouryear
decline from its peak of 109 in 2005. The OQ is based on responses
to questions about local construction activity for the coming year. This
year’s lower score indicates that many fewer respondents think 2009
construction activity will increase than think activity will decrease.

Industry Leaders See Improvement (Far) Ahead

While 2009 shapes up to be a challenging year, most contractors (73%)
and equipment distributors (63%) who foresee a decrease in activity
see a turnaround coming 12, 18 or 24 months from when the survey
was taken in October and November 2008. The largest share of these
distributors (28%) and contractors (29%) predict that improvement will
come 12 months from now; 18% and 21% respectively see improvement
18 months from now; and 20% of distributors and 28% of contractors
anticipate a turnaround 24 months from now.

The report notes that most survey participants expect to buy used equipment rather than new this year, but it also notes that most have old machines needing to replaced.

Even with their 2009 acquisition plans, for the third year in a row
contractors report that the average age of their principal equipment will
increase. For the first time in our Forecast, contractors are using equipment
that, on average, has been in service for more than a decade. The need to
eventually replace aging equipment may be creating a pent-up demand
that could affect future purchasing plans.

What does all this mean for folks in the market for Cat stock? Presumably, the markdowns will continue until orders pick up again sometime next year. BennieS, the most frequent commenter at the Cat message board, who’s been watching Cat since the 1970s, figures it’ll go down to about $30 and give everybody lots of indigestion for an extended stretch, but will eventually recover as it has so many times before.

I have no specific advice beyond never playing the stock market with money you can’t afford to lose.

(Hat tip for the Wells Fargo report to Construction Pundit.)

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Tom Mangan posted at 9:37 am January 16th, 2009 |

Non-residential construction expected to plunge this year

The good news just keeps washing over the Caterpillar watchers this morning:

The American Institute of Architects sees such construction activity falling 11 percent this year and another 5 percent in 2010, it said in its semiannual industry forecast. The group cited falling company profits and the lack of credit to finance projects.

Spending on hotel construction is expected to decline by more than 20 percent this year and another 12 percent next year. Construction of retail, office and industrial facilities is seen falling by double digits this year, with the rate of decline slowing in 2010, the AIA said.

“This is not expected to turn around anytime soon, and it’s likely to get worse before it gets better,” AIA Chief Economist Kermit Baker said in a statement.

Institutional categories, such as churches, schools and healthcare facilities, are forecast to post smaller declines this year.

Safe to say that in a bear market, nobody believes in Santa Claus after the 15th of January.

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Tom Mangan posted at 9:22 am January 14th, 2009 |

Where will Caterpillar’s construction business be at this time next year?

You’ll get a clue by checking out Architectural Record today. The site sports slick design and features pictures of the latest in way-cool building techniques, but it’s intuitive that because architecture is among the first phases of a construction project, the business should be a decent predictor of Caterpillar’s construction business. One intriguing item wonders if the Dubai Bubble is about to pop:

In recent weeks, delays have beset several massive projects there, according to several architects working in the area, and articles in The National, a United Arab Emirates newspaper. Dubai Waterfront, often referred to as Waterfront City, the 1.5-billion-square-foot development master planned by Rem Koolhaas/OMA, is moving much slower than anticipated. Completion of a detailed master plan for Palm Deira—a man-made, palm tree-shaped island—has been pushed back from this fall to late spring. And Palm Jebel Ali, another palm tree-shaped island, is being scaled back. Moreover, real estates prices are starting to drop.

“We are witnessing a global negative economic movement,” a spokesman for Nakheel, one of the country’s largest developers, told The National in mid-November. “The next few months will see a scaling back of activity around some of our projects.” Other developers are reporting layoffs. Damac Properties recently cut 200 jobs, sources say, while Omniyat Properties, a three-year-old company, let go of 60 employees.

Others quoted in the piece think things are going to be fine: I can’t help wondering who really wants to be in Dubai if oil is trading under $100 a barrel.

If you really want to get cheered up, check out AR’s recession roundup.

Previously: Non-Residential Construction Stumbles Badly.

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Tom Mangan posted at 11:20 pm December 21st, 2008 |

Construction spending for ’09: Bad news coming out of the woodwork

Construction Equipment magazine’s annual construction outlook report for 2009 is grim:

Construction spending will continue its three-year decline through the third quarter of 2009, down 9.5 percent in current dollars and more than 20 percent after adjustment for project-cost inflation. The precipitous spending declines in residential construction will finally reach bottom in 2009, albeit late in the year. Heavy construction and nonresidential construction spending, on the other hand, will drop sharply in 2009 after years of robust double-digit growth.

Construction equipment users and their suppliers will face subpar economic growth until late in 2010, which means better pricing and availability. Supply conditions loosened at the end of last summer when the world commodity price boom abruptly reversed. Materials, labor, equipment and design resources will be relatively more available and less expensive during the next two years.

Lots of charts and graphs with this report; most all of them pointing downward. Take a look through and ask yourself again how cheap Cat looks these days.

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Tom Mangan posted at 10:58 pm December 21st, 2008 |