McGraw-Hill Executive Comments On Economy and Construction

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Robert A. Murray, vice president of economic affairs at McGraw-Hill Construction Research and Analytics Group in New York City, issued a statement about the expected impact on construction activity. The text of his commentary:

Recent Financial Market Events—the Broad Impact on Construction

The upheaval in the financial markets during September has altered the financial landscape, which will affect funding for construction projects and, in turn, construction activity.

The situation with the financial markets continues to be fluid, particularly regarding the shape of the $700 billion mortgage buyout proposal. Given the sense of urgency coming from Treasury Secretary Paulson and Fed Chairman Bernanke, Congress is anticipated to pass some measure with revisions to the Treasury proposal, including oversight of the process by which the distressed mortgage securities are purchased. The expectation is that the purchased securities will increase in value as the housing market begins to improve in 2009 and beyond, which would allow them to be resold and decrease the potential cost of the bailout from $700 billion to something less. The key, of course, is that the decline in home prices comes to an end, and we don’t expect to see that until 2009 at the earliest.

The steps taken to provide stability to the financial markets will require time. The lending environment for commercial projects will probably grow even more difficult in the near term, before some credit easing begins to take hold, perhaps in the latter half of 2009. This means that the downturn in construction starts shown by commercial building in 2008, particularly for stores and warehouses, will grow more widespread in 2009, dampening offices and hotels as well. This had been our expectation prior to this September’s events; if these steps are successful, a rebound in commercial construction could occur earlier than expected, perhaps as soon as 2010 or 2011.

The institutional structure types, such as schools and hospitals, respond in a lagged manner to shifts in the economy and lending conditions. We expect to see a loss of momentum for 2009, given the deterioration in state and local fiscal health, although funding already raised through the bond market should help the initial stage of a construction slowdown remain gradual. In other words, the response to September’s financial turmoil is expected to be delayed and diffused. The same applies for public works, and a near-term plus for that sector is that Congress recently transferred $8 billion from the general fund to shore up the Highway Trust Fund. As for single-family housing, the steps to stabilize the financial markets, if successful, should help to stabilize homebuilding in 2009, although at a very, very low level.

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