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Construction Spending, Materials Pricing and Unemployment

As the economy continues to struggle to improve, offering a few bright spots among declines in construction spending, it is important for contractors to monitor the ups and downs and understand how these peaks and valleys affect their business. During a bad economy, contractors may expand to new geographic areas, bid on projects outside of their expertise or financial capacity, take thinner profit margins and self-perform work normally subcontracted out. All this can spell danger if not properly thought out. Each month, Associated Builders and Contractors Chief Economist Anirban Basu releases Construction Economic Updates.  A recent update reports declines in construction spending from the previous month but up from 2012, no change overall in materials prices and a slight dip in construction unemployment.

Construction Spending Falls

Indicating that the nation’s builders continue to struggle in the current economic environment, construction spending in both nonresidential and residential sectors was down 0.6 percent in June, according to the August 1 Construction Spending report by the U.S. Census Bureau. However, spending was 3.3 percent higher than last year. Nonresidential construction spending fell 1 percent in June and declined 4 percent during the past 12 months, with spending totaling $545.8 billion on a seasonally adjusted, annualized basis.

Private nonresidential construction slipped 0.9 percent, while public nonresidential construction spending decreased 1.1 percent for the month. On a year-over-year basis, private nonresidential construction is up 1.4 percent. Public nonresidential construction spending has dipped 9.3 percent during the past year, with the rate of decline accelerating in recent months.

Six of 16 nonresidential construction sectors posted spending increases in June:

  • power, + 3.6 percent;
  • communication, + 2.5 percent;
  • transportation, + 1.9 percent;
  • health care, + 1 percent;
  • office, + 0.8 percent; and
  • amusement and recreation, + 0.4 percent.

Four subsectors have experienced higher spending compared to one year ago, including:

  • lodging, + 22.7 percent;
  • water supply, + 6.8 percent;
  • power, + 5.7 percent; and
  • transportation, + 4.3 percent.

The largest declines occurred in:

  • conservation and development, – 9.4 percent;
  • religious, – 6.8 percent;
  • water supply, – 5.5 percent;
  • sewage and waste disposal, – 5.3 percent; and
  • commercial, – 5.1 percent.

On a year-over-year basis, construction spending has softened in 12 subsectors. The largest losses occurred in:

  • conservation and development, – 17.2 percent;
  • communication, – 13.8 percent;
  • educational, – 12.6 percent;
  • highway and street, – 12.4 percent; and
  • religious, – 12.2 percent.

“Nonresidential construction spending momentum remains subdued,” said Basu. “The nation has now entered its fifth year of economic recovery and second quarter gross domestic product estimates released yesterday were better than anticipated. Despite that, nonresidential construction and most of its sub-components are associated with stagnant spending or worse…A majority of nonresidential segments experienced declining activity in June, which often represents a period of accelerating, not decelerating, activity.

“This would not be as problematic were the declines in spending relegated to publicly financed segments,” said Basu. “Given sequestration and constrained state and local government capital budgets, declines in publicly financed construction are not particularly surprising. “However, the recent bankruptcy of Detroit will likely translate into conservative budgeting during the months ahead as financiers and policymakers adopt an even more cautious stance regarding major capital outlays.

“The conventional wisdom is that the second half of the year will be better for the broader economy, which would imply better nonresidential construction performance in 2014,” Basu said. “However, with interest rates now rising, there are reasons for contractors and other stakeholders to remain cautious.”

Construction Materials Prices Remain Flat

Construction materials prices were unchanged in July but are up 2 percent year over year, according to the latest Producer Price Index release by the U.S. Labor Department. Nonresidential construction materials prices were down 0.1 percent for the month and are 1.8 percent higher than one year ago.

  • Crude energy prices climbed 4 percent in July and crude petroleum prices jumped 10.6 percent. Year over year, crude energy prices are up 21.6 percent.
  • Prices for plumbing fixtures and fittings increased 2.1 percent from June and are up 3.1 percent annually.
  • Prices for prepared asphalt, tar roofing, and siding rose 2 percent for the month and are 4.7 percent higher than the same time last year.
  • Iron and steel prices increased 1.7 percent in July, but remain 2.8 percent lower on an annual basis.
  • Prices for steel mill products edged 0.4 percent higher in July, but remain 6.1 percent lower than one year ago.
  • Prices for concrete products were 0.5 percent higher for the month and are up 3.3 percent compared to last year.

Key construction inputs that did not experience price increases for the month include:

  • Fabricated structural metal products, which were unchanged and have been flat on a year-over-year basis.
  • Softwood lumber prices slipped for the third straight month, down 0.5 percent in July, but are still 9.9 percent higher than one year ago.
  • Nonferrous wire and cable prices fell 1.1 percent for the month and are down 3.9 percent from July 2012.

Overall, the nation’s wholesale goods prices were flat in July and are 2.1 percent higher than the same time last year. “According to today’s Producer Price Index report, nonresidential construction materials remained well behaved, with aggregate price levels falling 0.1 percent in July and inputs to nonresidential construction increasing less than 2 percent during the past year. Input price inflation is rarely so well contained. However, looking beyond the headline number reveals a different story. In July, many nonresidential materials prices expanded, some of them significantly. For contractors, the implication is that not all materials prices are well behaved. Prices fell in certain categories, including softwood lumber and nonferrous wire and cable. Those declines help explain the flat overall PPI number for the month, but do not change the fact that materials prices remain more volatile than they might appear at first glance,” said Basu.

Construction Unemployment Dips

Despite the loss of 6,000 jobs, the nation’s construction industry unemployment rate dipped to 9.1 percent in July on a non-seasonally adjusted rate, according to the U.S. Labor Department’s August 2 employment report. That is down from 9.8 percent in June and 12.3 percent the same time last year. Overall, the construction labor force expanded from 8.08 million in July 2012 to 8.43 million in July 2013.

Nonresidential building construction employment increased by 300 jobs for the month and is up by 18,700 jobs, or 2.8 percent, since July 2012. Nonresidential specialty trade contractors lost 9,800 jobs for the month, but employment remains 1.8 percent higher compared to one year ago. Employment for heavy and civil engineering construction was down by 2,000 jobs for the month, but is up by 19,200 jobs, or 2.2 percent, on a year-over-year basis.

In comparison, residential building construction employment increased by 100 jobs in July and has expanded by 7,400 jobs, or 1.3 percent, during the past 12 months. Residential specialty trade contractors added 6,200 jobs in July and have added 84,700 jobs, or 5.8 percent, since July 2012.

Across all industries, the nation added 162,000 jobs, falling short of consensus expectations that were in the neighborhood of 183,000 jobs. The private sector expanded by 161,000 jobs and the public sector added 1,000 jobs. The national unemployment rate fell to 7.4 percent in July, down from 7.6 percent in June and 8.2 percent in July 2012.

“Today’s employment report is consistent with the June construction spending report, which indicated that overall construction spending declined by 0.6 percent and that nonresidential construction spending was off by 1 percent,” said Basu. “That type of performance is not consistent with robust job creation, so it’s no surprise that the construction industry did not deliver net new jobs last month. The major source of construction employment loss was among nonresidential specialty trade contractors, which forfeited nearly 10,000 jobs in July … This segment had been recovering nicely, but now appears to be feeling the effects of an economy growing at less than 2 percent.

“Meanwhile, the loss of 2,000 jobs in the heavy and civil engineering construction sector may be a partial reflection of sequestration. Despite the job losses, the construction unemployment rate declined last month; however, much of the drop has been attributed to people leaving the industry. Financial markets responded to today’s data in a number of ways, including lowering interest rates,” said Basu. “All things being equal, lower rates are better for the U.S. nonresidential construction industry’s still sporadic recovery.”