Oct. 14 (Bloomberg) -- New York City construction spending will set a record of $33.8 billion this year, before declining through 2010 as a credit drought and government budget cuts slow the building boom, the New York Building Congress said.

Spending will fall to $33.4 billion in 2009 and $26.2 billion in 2010, the group said in its annual construction outlook. The number of people employed in construction may fall 23 percent in two years to 100,250, the fewest since 1997, from this year's record of 130,100. The congress called that ``the most troubling aspect'' of its report.

``Many of the new jobs have been filled by people from outside of the city, perhaps on a temporary basis,'' said Richard Anderson, president of the trade association, which represents real estate, construction, engineering and architecture firms. ``So in some cases, the dislocation will not be to the resident workforce. But in other cases it'll lead to unemployment. And that's a major concern.''

The congress estimates that about 18,500 residential units will be built in the city in 2010, compared with 20,285 next year and 35,700 this year. Housing construction spiked this year in part because of changes in the city's tax incentive program, which encouraged developers to start projects before July 1.

`Source of Strength'

Non-residential development, which the report called ``a continuing source of strength'' for New York, should increase next year to $11.5 billion from $10 billion this year before falling to $7.1 billion in 2010. This category includes offices, colleges, hospitals, sports and entertainment facilities.

Government projects, which include mass transit, public schools, roads, bridges and water mains, should reach $17.4 billion, up from $17 billion this year, and drop to $14.4 billion in 2010.

For the first time in the eight-year history of the report, the association projected two scenarios for the New York construction market. The first, which was written before last week's near-record 18 percent decline in the Dow Jones Industrial Average, assumes the success of government efforts to ease the credit crunch, driving office and housing demand.

The second scenario sees a prolonged recession, with the government cutting transit, education and infrastructure projects and adopting a more anti-development stance.

`Digging a Hole'

Anderson called that ``the market crash scenario, which says we're not going to get out of this, it's really going to dig us into a hole and that would mean the numbers will be far lower than what we forecast.''

The $33.8 billion of construction is 16 percent more than 2007, and about 12 percent more than the $30 billion the group projected for this year 12 months ago. The congress compiles its estimates by examining building permits and government capital budgets.

The key to maintaining the city's construction industry and its jobs is for federal, city, and state, and public authorities such as the Metropolitan Transportation Authority and the Port Authority of New York and New Jersey, to maintain their capital allocations, Anderson said. Government funds about half of New York's construction, he said.

The city has already stretched its four-year capital program to five years, ``which is in effect a 20 percent decline,'' he said.

New York City is focusing on maintaining its $38 billion capital program, even as tax revenues decline due to losses at financial firms, said Seth Pinsky, president of the Economic Development Corp. That budget is used to build and maintain roads, bridges and schools.

``New York City and its residents have been through worse, and we'll get through this,'' said Pinsky, citing 9/11, the dot- com bust, the early 1990s recession, and the fiscal collapse of the late 1970s.

To contact the reporter on this story: David M. Levitt in New York at dlevitt@bloomberg.net.

Last Updated: October 14, 2008 12:53 EDT