Is Construction Really Slowing?

Industry observers have doubts

According to the U.S. Census Bureau, both overall construction activity and residential construction have now fallen for five months in a row. Since construction is one of the most interest-sensitive sectors of the economy, this downward trend is evidence that the Federal Reserve's rate hikes are having their intended effect.

But are they? Despite the Census estimates, many industry and company reports show little if any slackening of demand. In August, sales of new single-family homes clocked a solid 983,000 annual rate, just 2,000 shy of the all-time high recorded in November, 1998. So far this year, in fact, they are running at a 913,000 annual clip--2.6% above last year's record selling rate of 890,000.

Other housing market reports tell a similar story. Existing home sales seem headed for another record year, housing starts in August were up 3.8% above their year-earlier pace, and homebuilders remain highly optimistic. Meanwhile, home prices are running a healthy 5% above their year-ago levels.

"We were expecting a slowdown," says economist David F. Seiders of the National Association of Home Builders, "but things are still pretty darn exuberant." Noting that many home buyers have been shifting to adjustable-rate mortgages to deflect the impact of higher mortgage rates, he sees no real letup in demand so far. "There's a clear disconnect," he says, "between what we're experiencing and the construction downturn reported by the government."

Economist Joseph Carson of Deutsche Bank Global Markets Research agrees. He points out that one sensitive measure of construction activity, the construction contract index of F. W. Dodge Div./The McGraw-Hill Cos., has been steadily revised upward this year--possibly, he thinks, because data tend to be reported late when developers and contractors are very busy. As of August, the index for the first quarter stood 17% above the initial monthly estimates, and the second quarter was up 12%. "If past revisions are any guide," he says, "we will see more large upward revisions for recent months."

To Carson, all of this indicates that the government missed the boat. Besides residential building, he sees signs of rising activity in recent reports of warehouse building by Internet companies, office and hotel construction in major cities, and announcements of new government infrastructure projects.

For his part, Seiders thinks it's possible that the reported recent construction slowdown did take place--but because of supply rather than demand problems. "We've had widespread reports of shortages of building materials and construction workers, and that's hampering activity," he says.

To the Fed, of course, neither Carson's nor Seiders' view is reassuring. If construction demand remains basically strong, there may be little chance of a near-term economic slowdown.