2009 Economic Overview,

Construction spending prospects are declining rapidly at the beginning of 2009 as the credit freeze recession spreads rapidly through most economies around the world. Job site activity, project starts and pre-start development planning will continue to decline well into 2009 but most markets will be improving from depressed levels by yearend. The heavy/engineering market will weather the recession best because of the source of its funding and some federally financed economic stimulus civil construction spending in the second half of the year.

The lastest (October) report on construction spending was a 1.2% month-to-month drop. The November jobs report assures another similar fall in construction spending in November. Housing construction continues to drop. Nonresidential building and heavy construction have both begun to decline in the last few months. Construction spending fell 11.6% in the last two and half years in current dollars with the inflation adjusted drop over 20%.

More significantly for the 2009 outlook, the project starts trend weakened sharply late in 2008 after trending down slowly for about a year. This was entirely due to a 30% plunge in nonresidential building starts in October from September while heavy project starts surged to a record high level. Starts fell 44% for private "for lease" projects — offices, retail, hotels and warehouse — that are the most sensitive to credit conditions and prospective spending in the economy.

The abrupt October decline in private commercial starts includes some projects put on hold until market prospects are clearer or financing arrangements can be reworked. Some of these projects will return in the coming months. However, the negative impact of the recession is delayed for project starts for public and institutional work. Starts in these sectors will gradually erode as tax collections and investment earnings continue to shrink. Already, some 2009 start projects have been delayed or cancelled.

These are the key assumptions in the Reed Construction Data outlook:

The 2008–09 recession will be more severe than the recent mild recession in 2001 and the early 1990's but less severe than the deep recessions in the early 180-s and the mid-1970's.
The recession will be front loaded — the panic from the surprise credit problems in September 2008 caused a larger than normal share of the inevitable spending cutback decisions to be made early. Q4 2008 GDP will drop as much as 4% with several smaller declines following.
The 60% drop in energy prices is providing a huge boost to consumer income and the reduction of business operating costs and will prevent any further erosion in spending confidence
Congress will enact another economic stimulus spending plan very quickly. The 2008 stimulus spending interrupted the recession in Q2 2008 with +2.8% GDP growth. The new plan will have a similar impact in mid-2009 and possibly may be enough to end the recession.
The recovery from the recession will be unusually slow because credit costs will remain high for a recession period as lenders try to replace the capital lost to unpaid residential mortgages.
The housing market will begin to recover before other sectors because it's recession began two years earlier than the rest of construction.
The decline in the nonresidential building market is not due to overbuilding but to credit access and overall economic spending issues so there is some additional growth left in this building cycle beyond 2010.
Regional Economies
The Gulf Coast was the only region whose economy was still expanding at the end of 2008, based on information through October. But falling energy prices and the resulting oil & gas field investment cuts will push Texas and Louisiana into recession early 2009.

State Economic Activity Index Ann. % change — last 3 months
Great Lakes -3.3%
Pacific -2.8%
Rocky Mountain -2.5%
South Atlantic -2.4%
Plains -1.6%
Mid Atlantic -1.4%
New England -1.3%
Gulf Coast +1.0%
(Source: Federal Reserve Bank of Philadelphia)
Each regions economic condition is set by the health of its key industries. The Great Lakes economy, dominated by motor vehicle and other manufacturing, has declined further relative to the rest of the country in the final months of 2008 and this will continue well into 2009. The expected emergency loan to the auto companies from the federal government replaces private credit no longer available but comes with spending cut mandates that will reduce industry labor costs in 2009 and further weaken the regions' economy.