Robust spending on commercial and government construction projects has helped building materials suppliers thrive lately, despite a drop in new home construction.

Providers of concrete, aggregates, asphalt and other building materials are benefiting from highway reconstruction efforts and other public works projects as well as construction of new shopping centers and office buildings.

These companies are the bedrock of the economy. So if they''re doing well, it''s a safe bet that the overall economy is healthy, too.

The building materials market is "doing extremely well, even in the face of volume declines," said Jack Kasprzak, an analyst with BB&T Capital Markets. "We continue to see very good pricing, strong results, good guidance -- and the stocks have performed pretty well."

The volume declines are largely the result of the housing construction downturn, Kasprzak says. But housing accounts for just 25% of total demand for aggregates, which includes crushed stone, sand and gravel.

The biggest buyer of aggregates is the public sector, including federal and state governments. And that sector has "ramped up nicely over the last year," Kasprzak said.

1. Business

IBD''s industry group for building materials such as aggregates, cement and concrete includes 16 companies. The biggest are France''s Lafarge (NYSE:LR - News), Mexico''s Cemex (NYSE:CX - News), Ireland''s CRH (NYSE:CRH - News), Australia''s Rinker Group (NYSE:RIN - News) and the U.K.''s Hanson (NYSE:HAN - News).

But the top performers in the segment are mostly U.S. companies such as Martin Marietta Materials (NYSE:MLM - News), Vulcan Materials (NYSE:VMC - News) and Texas Industries (NYSE:TXI - News).

They provide materials used in the construction of highways, airports, commercial buildings and homes. These materials include crushed rock, sand, gravel, concrete and asphalt.

The market for aggregates and related building materials is fragmented, with many independent suppliers. Consolidation has been going on for years as companies look to acquire new quarries and expand into growing states.

Vulcan Materials'' planned $4.6-billion purchase of Florida Rock Industries (NYSE:FRK - News) is the biggest recent acquisition. Vulcan announced the deal Feb. 19 and expects to close the deal by mid-year.

The Vulcan-Florida Rock deal is a "blockbuster combination," Davenport & Co. analyst Robert Norfleet wrote in a research report. It combines "two high-quality organizations that have proven track records (and) valuable reserves in key high growth markets."

Last October, Cemex made a hostile takeover bid for Rinker worth $12.8 billion. The U.S.        Department of Justice said Wednesday that Cemex had agreed to divest 39 ready-mix concrete, concrete block and aggregate facilities in Arizona and Florida if it succeeds in its buyout bid.

Last August, CRH bought Ashland Paving and Construction of Atlanta for $1.3 billion. APAC is a leading U.S. aggregates and asphalt company with operations in 14 Midwest and southern states.

Consolidation among building materials suppliers will continue, with the possibility of more megadeals, Kasprzak says. Together, the top 10 aggregates producers have about 40% market share.

The market for cement is much more concentrated. The top five cement companies produce more than 50% of total output, according to Columbine Capital.

The key for suppliers of building materials is proximity to growth markets. Aggregates are heavy and expensive to transport, so having reserves nearby is critical.

Since the bidder with the closest quarry usually gets the business, firms are looking to buy or develop new mines near fast-growing markets, says Donald James, chief executive of Vulcan Materials.

U.S. building materials suppliers have focused on the southern and coastal states for acquisitions because that''s where the population growth and new construction are, Kasprzak says.

Name of the Game: Cash in on growth markets through acquisitions and developing new quarries.

2. Market

U.S. construction spending -- a big source of sales for the group -- is on pace to fall 2% this year to $1.17 trillion, based on spending through February, according to the        Commerce Department. The decline in housing construction is the main reason for the dip.

Meanwhile, public construction spending is on track to rise 6% this year to $286 billion. Commercial and government construction projects have kept the industry humming. But if one of those were to stall, it would spell trouble.

Spending on private, nonresidential construction -- commercial, office, retail, hospitality -- is most at risk.

"Those types of projects are more highly levered to the economy, job growth, interest rates, consumer confidence and business spending," Kasprzak said.

3. Climate

The strength of public infrastructure and commercial building projects has helped to offset slumping home construction.

Politicians have shown a growing interest in funding public works improvements. They realize that the nation''s deteriorating infrastructure, especially the highway system, could jeopardize economic growth, Kasprzak says.

"The infrastructure of the United States is in dire need of repair," he said. "The amount of money being put into the infrastructure has increased. But there''s a lot of evidence that it''s not enough. And so more needs to be done to update the infrastructure."

Congress passed a new highway-funding bill in the summer of 2005. States also are stepping up their spending on infrastructure improvements.

In California, Gov.        Arnold Schwarzenegger has pushed for a dramatic increase in funding for the state''s infrastructure needs.

Texas and Florida also have been aggressive in investing in their infrastructure, Kasprzak says.

4. Technology

Top suppliers of aggregates, concrete and other building materials have gotten more efficient. They''ve learned to be more productive with fewer employees.

Companies today can run a plant with one person sitting in a control tower where it used to take six people to run it, Vulcan''s James says.

Firms also use technology to better map and plan mine usage, he says. Mines can have economic lives of 25 or 30 years, so they need to be excavated efficiently and with an eye toward use of the land once mining is completed, James says.

"We are large landowners, and our land is largely in metropolitan areas -- and we are very cognizant of the fact that mining is an interim use of the land," James said. "Our land will likely end up as either residential or commercial development around a beautiful turquoise quarry lake. So we are using technology to help us maximize both the efficiency of our production and the value of our residual real estate."

5. Outlook

Suppliers of building materials are keeping an eye on the housing market. The decline in new home construction probably is a short-term phenomenon, James says.

"We believe that in markets where population is growing, jobs are being created and households are being formed at much higher rates than the rest of the country, the housing market will correct itself and will come back," James said.

Providers of aggregates have benefited from strength in pricing for their products during the current cycle, says BB&T''s Kasprzak.

Upside: Federal and state governments are pouring money into badly needed infrastructure improvement projects, such as highway, airport and sewer system upgrades. The new-home construction slump could be short lived in growth states where building suppliers are focused.

Risks: If private, nonresidential construction activity falters, makers of aggregates, concrete and other building materials would suffer.