Construction Activity in May Climbs 4 Percent, According to McGraw-Hill Construction.

Business Editors

New construction starts increased 4 percent in May to a seasonally adjusted annual rate of $496.6 billion, according to the Dodge Division of McGraw-Hill Construction, part of The McGraw-Hill Companies (NYSE: MHP).

Greater activity was reported across a wide range of project types, resulting in moderate growth for the industry's three main sectors - nonresidential building, residential building, and non-building construction (public works and electric utilities).

The latest month's data raised the Dodge Index to 150 (1996=100), compared to a revised 144 for April. The Dodge Index began 2002 at a brisk pace, averaging 158 during the first two-months of the year, before dropping to 141 in March. "The improved activity in April and May shows the construction industry climbing back to last year's pace, when the Dodge Index averaged 149," stated Robert A. Murray, vice president of economic affairs for McGraw-Hill Construction. "However, this year is seeing a different mix by project type - more single family housing and public works, while commercial building remains well below the levels reported in the early months of 2001."

Nonresidential building in May climbed 6 percent to $156.6 billion, helped by strong gains for several institutional categories. Healthcare facilities jumped 32 percent as the volume of new hospital construction stayed strong. Amusement-related work advanced 23%, boosted by the start of a $131 million convention center in Hartford CT, while the public building category rose 55 percent with the start of a $100 million prison in Indiana. Transportation terminal work doubled, aided by the start of $161 million cargo storage facility at New York's JFK International Airport and a $48 million airport terminal expansion in Tucson AZ. At the same time, school construction in May settled back 13 percent following an exceptionally strong amount in April.

Commercial construction registered some improvement in May, with hotels up 5 percent stores up 8 percent and warehouses up 16 percent. Despite these gains, hotel and warehouse construction are still substantially weaker than their first half 2001 levels. Office construction in May continued to erode, slipping an additional 1 percent. Murray noted, "The office market witnessed a steep correction over the past year, and while the rate of decline has eased, there's not much chance that a sustained upturn will take place anytime soon." Manufacturing plant construction also showed further weakening in May, dropping 14 percent.

Residential building, at $238.5 billion, was up 2 percent in May. The modest increase was the result of a 1 percent gain for single-family housing, combined with a 13 percent pickup for the multifamily side of the market. Single-family housing is still very healthy - contracting in May was 9 percent above the monthly average for 2001. Murray stated, "The low cost of financing continues to support homebuyer demand, outweighing the negatives of shaky consumer confidence and higher unemployment." This support will remain present for at least the near term - the 30-year fixed mortgage rate averaged 6.8 percent in May, and towards the end of June it had edged down to 6.6 percent. By region, residential building in May showed growth in the West, up 5 percent; the Northeast, up 4 percent; the South Central, up 3 percent; and the South Atlantic, up 2 percent. The one region to see a residential decline in May was the Midwest, down 1 percent.

Nonbuilding construction in May grew 3 percent to $101.6 billion. Much of the upward push came from a 19 percent gain for electric utilities, rising for the second straight month after sharply reduced contracting in February and March. May featured the start of large power plant projects in South Carolina ($450 million), two in Indiana ($400 million and $211 million), and Texas ($105 million). The pattern for public works in May was mixed - the largest public works category, highway construction, was up 7 percent; and river/harbor development work advanced 10 percent. On the negative side, May witnessed decreased contracting for bridges (down 2 percent), water supply systems (down 13 percent) and sewers (down 17 percent).

During the first five months of 2002, total construction on an unadjusted basis maintained a 1% lead over the same period of 2001. By sector, residential building was up 10 percent, followed by a 1 percent gain for non-building construction. In contrast, nonresidential building trailed its 2001 pace by 11 percent. In terms of geography, total construction showed this pattern during the January-May period - the Northeast and Midwest, each up 7 percent; the South Atlantic, up 6 percent; the West, down 4 percent; and the South Central, down 10 percent.

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