Total spending for residential construction projects will continue to expand in 2005, but the main driver of growth will shift from new houses to improvements on existing homes.

Click Image to Enlarge

Total spending for residential construction projects will continue to expand in 2005, but the main driver of growth will shift from new houses to improvements on existing homes. In 2004, total spending on residential additions, alterations, and repairs expanded by an estimated 8% to a total of over $190 billion. Next year, homeowners will increase their spending on home improvements and repairs by another 6% to just over $200 billion. After a 6% increase in 2004 to nearly 2 million units, new housing starts will decline 5% in 2005 to a still robust total of 1.8 million units.

Another sector that will continue to grow in 2005 is nonresidential construction. It started to gain momentum in the second half of 2004, and the numbers so far in 2005 are up a solid 7%. For 2004 as a whole, spending on nonresidential projects increased 4%. Healthy gains in the lodging, health-care, highway/street, and sewage/waste-disposal sectors accounted for most of this growth. This momentum will carry through 2005, and there should also be growth in the commercial and industrial segments. In total, spending for nonresidential construction will expand at least 6% in 2005.

These forecasts are based on established trends in the overall U.S. economy--steady growth in consumer spending, a gradual increase in total employment, relatively low interest rates, a low value of the dollar compared with the currencies of our major trading partners, high levels of corporate profits, and a steady rise in capital investment by U.S. businesses. Gradual declines in the prices of petroleum products are also a factor in our outlook.

According to our Window/Door Business Index, 2004 was a record year for the vinyl window industry. After a year of no growth in 2003, domestic production of vinyl window and door profiles jumped an eye-popping 28% in 2004. And the fact that this rise occurred during a time when resins price were trending sharply higher is particularly impressive. Unfortunately, this rate of expansion will not be sustained in 2005, though production levels will remain quite high. The forecast calls for a decline of 5% in vinyl window production in 2005.

The good news is that the underlying market fundamentals that spurred the industry's growth in 2004 will remain pretty much intact throughout 2005. These include high prices for home heating fuels, relatively low interest rates, and the sharp increase in home equity values in recent years. Augmenting these factors in 2005 will be a steadily improving job market and strengthening household income growth.

Over the past 10 years, the rate-of-change curve for the Window/Door Business Index has exhibited a very clear cyclical pattern, and the distance between the peaks and troughs has averaged two and a half years. The latest data indicate that the curve just recently passed its cyclical peak. Based on this cyclical pattern, and also on our expectations for a moderate decrease in residential construction activity in the U.S., we expect a moderate decline in the output of vinyl windows and doors this year.

The Pipe Business Index indicates that the annual output of plastics pipe in 2004 exceeded the level of the last peak year (1999). Overall production increased by 8% in 2004 after posting a gain of 5% in 2003. High levels of construction activity, both residential and nonresidential, will support the market for plastic pipe in 2005, but the growth curve is past its cyclical peak, so the market's growth will decelerate as the year progresses. The forecast is for production of plastics pipe to expand 5% in 2005.

Most of this growth will come from a continued increase in demand for HDPE pipe, both smooth-wall and corrugated. In 2004, our indicator for the corrugated pipe market rocketed up 35% compared with the previous year. Spending for nonresidential construction projects has accelerated in recent months, and this momentum will be sustained through this year. Production of non-corrugated HDPE pipe was up 6% in 2004, and the market was gaining strength as 2005 began. When all of the segments are combined, the total output of HDPE pipe will increase at least another 8% in 2005.

Output of PVC pipe grew 7% in 2004, but the momentum in this segment has eased. Materials prices will decline moderately in 2005, and this should help keep the market for PVC pipe steady to up in 2005.

According to our Siding Business Index, domestic production of vinyl siding advanced 9% in 2004 compared with the previous year. This followed a decline of 5% in 2003. The rate-of-change curve for this data, a measurement of market momentum, hit its cyclical peak in as 2004 came to an end, so the growth rate will decelerate in 2005. The current forecast calls for a modest gain of 2% in output of vinyl siding this year.

The cyclical pattern in the siding data correlates closely with the cyclical pattern in U.S. housing starts. After posting a solid gain of 6% in 2004, the trend in housing starts will head downward through 2005. Despite this decline, residential construction levels will remain at elevated levels. And while the number of new houses started will decrease 5% this year, spending for alterations and improvements to existing homes will expand by 5%.

Homeowners who have invested in their properties have been handsomely rewarded with much lower maintenance costs and sharply higher property values during the past few years. This will keep the demand for siding at high levels.