Uncertainty is nothing new for economists to grapple with, but this month's terrorist attack on the U.S. that left a large portion of lower Manhattan in smoking rubble also is casting a cloud over economic forecasts for the remainder of this year as well as 2002. There has been much speculation that the magnitude of the attack may be enough to shake consumer confidence and tip the overall economy into recession. However, economists interviewed by ENR for its Third Quarterly Cost Report believe the U.S. economy is too large to be knocked off balance by this terrorist attack, despite its massive human and financial costs.

"While the financial sector will suffer, the base economy was not hit by this attack and will continue to function, although the initial shock may take several months to wear off," says John Anton, an economist with the Washington, D.C.-based forecasting firm dri-wefa. The firm has put together a "shock forecast" to measure the impact of the terrorist attack on the U.S. economy. It sees most of the negative impact confined to the fourth quarter of this year, with the economy coming back strongly in the first half of 2002.

DRI-WEFA's original "base forecast" called for gross domestic product to grow at an annual rate of 2.1% during the fourth quarter. The "shock forecast" has trimmed that prediction back to only 0.1%. But that is the worst of it. DRI-WEFA's "shock forecast" expects GDP to grow at an annual rate of 2.2% in the first quarter of next year, compared to its original 2.3% forecast. By the second quarter of 2002, DRI-WEFA sees the economy making a strong comeback with GDP growing at an annual rate of 3.5% compared to its original forecast of 2.8%. Overall, GDP is now expected to grow 1.4% this year and 2.2% next year. This is only down slightly from the original 1.5 and 2.4% growth rate predicted before the terrorist attack occurred.

The impact on construction costs, which are ultimately driven by supply and demand, would appear to be minimal. Construction growth and demand currently are being driven by a very strong public works sector. By its nature, public construction is insulated from external shocks and, if anything, may intensify as a rebuilding program gets under way. The huge housing market also is stronger than expected in the wake of eight consecutive interest rate cuts by the Federal Reserve Board since the beginning of the year, including a 0.5% cut on Sept. 17. DRI-WEFA is calling for a fairly strong housing market over the next two years.

Obviously, the impact of the terror attack on construction costs in the New York City area has the potential to be significant, with approximately 27.5 million sq ft of buildings destroyed or damaged. "The inflation factor will possibly be something to contend with as New York City starts to rebuild," says Paula Tocci Federman, CEO & president of Federman Design + Construction, a New York City-based cost consulting firm. Federman's firm prepared original cost estimates for the World Trade Center towers and several major surrounding structures prior to construction. The disaster had little immediate impact on projects outside the downtown area, says Federman. "Most projects that were under way are still going and currently we are not experiencing any trouble in getting materials," she says.

The longer range cost implications depend largely on critical decisions yet to be made. These include whether to rebuild as "Fortress New York City" or with a series of lower-rise structures, and what kind of tax incentives will be offered to keep firms in the area.

"One immediate cost in lower Manhattan will be cleaning HVAC systems in surrounding buildings that have been contaminated with ash and other debris. In addition, there is the challenge to replace and repair the computer cabling and fiber-optic networks that were wiped out," says Federman. "There will be a tremendous cost associated with these upgrades."

 Click here to view: CONSTRUCTION MATERIALS PRICE MOVEMENT IN 2001

UNDER CONTROL Inflation remained under control in most areas during the third quarter, with the notable exceptions of the labor and lumber markets. Cost indexes were pushed up as new wage settlements came in with their largest increases in a decade. In addition, lumber prices shot up in June, pulling most cost indexes up with it. However, lumber prices immediately collapsed in July and August and inflation measured by the many cost indexes began to subside. The annual escalation rate for ENR's Building Cost Index went from 0.5% in June to 2.3% in July and back down to 1.6% this month. There is a month lag before movement in lumber prices is reflected in ENR's indexes.

"In general, we're seeing the overall price structure in the construction industry remain fairly stable——a little appreciation, but nothing significant," says Charles B. Muttillo, vice president at Morley Construction Co., Santa Monica, Calif. At 2 to 3%, the cost increases reflect the overall rate of inflation, he says.

One notable exception is ready-mix concrete, Muttillo says. In 2001, "We've seen an increase of probably 5%, up to $3 per cu yd," he says. "Some of that, we think, is related to the energy crisis" and increased production costs. Prices currently are holding steady after this year's increases, he adds. ENR's 20-city average price for ready-mix concrete is up 6.8% for the year, while prices for portland cement are up just 1%.

 Click here to view: FEDERAL-AID HIGHWAY BID PRICE INDEXES

Steel prices remain stuck at very low levels despite steel producers clearing much of the inventory surplus that had pushed prices down earlier. "When demand was good, supply was out of control and now that supply is back in line, the demand is just not there," says DRI-WEFA's Anton. He believes prices for hot-rolled carbon steel sheet hit bottom in the third quarter at $243 per ton and will gradually climb back to $324 by the third quarter of next year. However, this is well below the $390 set in late 1994.

Insurance costs may be one place inflation is brewing. ENR's annual survey of workers' compensation, conducted by Marsh USA, New York City, shows rates easing back from last year's large gains. However, many analysts believe compensation rates are set to take off again.

"Insurance rates are going up, especially worker's compensation insurance," says Muttillo. "For some firms, it's over 100% and for others 20 to 30%," he says. "In general, the insurance industry is raising prices, and that just ripples through the industry."

Bechtel Corp., San Francisco, is taking an increasingly proactive approach to mitigate rising medical costs by emphasizing worker safety and reducing friction historically associated with workers' compensation claims, says risk manager Lucy Gallagher. Bechtel has driven down workers' compensation costs through collective bargaining and a "patient advocacy" program in which injured workers are immediately in touch a counselor.