Construction Economic Notes – February, 201302/15/2013 by Bernard M. Markstein
The United States economy continues to chug along despite numerous hindrances. At first glance, the preliminary report for fourth quarter 2012 gross domestic product (GDP) would seem to contradict this view. According to the Bureau of Economic Analysis, real (inflation-adjusted) GDP growth decreased 0.1% at a seasonally adjusted annual rate (SAAR). This apparent stall in the economy was largely due to a plunge in defense spending and a drop in business inventories. The sharp fall in defense spending is unlikely to repeat unless sequestration goes into effect on March 1. The decline in business inventories appears to be unintended and is likely to be reversed in coming months, adding to growth in the near term.
The growth figure is an advance estimate based on incomplete data and subject to revision. There are several reasons to expect that fourth quarter growth will be revised up in future reports.
The GDP numbers included a 1.1% (SAAR) decrease in investment in nonresidential structures. This estimate was based on data released in January and did not include the more positive numbers released in early February. The Census Bureau reported that total commercial construction spending rose 0.9% in December from November. The report included an upward revision in the October and November spending numbers: $8.0 billion and $11.0 billion, respectively. Thus, expect the nonresidential structures number for the GDP accounts to be revised up in subsequent reports.
Exports were reported as falling 5.7% (SAAR) in the fourth quarter GDP numbers, reducing GDP growth by 0.8%. However, December export data, which were not available at the time of the preliminary GDP estimates, came in stronger than expected. As a result, exports will likely be revised up in next month’s GDP report.
Further, there was some positive news buried in the GDP numbers. Among the items of interest were:
- Personal consumption expenditures (PCE) continued to show strength, up 2.2% compared to 1.6% in the third quarter, an indication the consumer is feeling more confident and is willing to spend
- Residential construction increased a robust 15.3%, a reflection of the continuing recovery in the housing market
- The PCE price deflator, one of the key indicators the Federal Reserve uses to measure inflation and guide Fed monetary policy, rose a moderate 1.2% (SAAR) in the fourth quarter. The PCE was up only 1.5% on a year-over-year basis—well within the guidelines set by the Fed to maintain its current low interest rate target
Among recent positive indicators for the economy is nonfarm payroll employment, which increased 157,000 in January. Even more positive was the annual benchmark revision of 2012 employment. Non-farm payroll employment was revised up an average of 494,000 per month. The fourth quarter average monthly increase was revised from 151,000 to 201,000.
Seasonally adjusted (SA) construction employment increased for the eighth month in a row, up 28,000 in January to 5,731,000—its highest level since September 2009. The not seasonally adjusted (NSA) construction unemployment rate was 16.1%, down from 17.7% in January 2012. Reports of spot labor shortages in construction are beginning to trickle in from some parts of the country.
Despite recent positive economic news, the economy faces various negatives that are already adversely affecting growth and could send the economy back into recession. Congress passed, and the president signed into law, a measure temporarily increasing the debt ceiling until May 18—delaying the possible shutdown of much of the federal government and the potential default on Treasury securities. Raising the debt ceiling only delays the potential harm to the economy.
With the debt ceiling temporarily lifted, the immediate threat is now sequestration, the automatic across-the-board cuts in most federal spending, set to occur on March 1 unless a budget agreement reduces federal spending or Congress pushes back or eliminates the deadline altogether. The threat of sequestration is already having an adverse effect on normal government operations and current economic activity.
The most visible example is the delayed deployment of the USS Harry S Truman to the Gulf, cutting the United States’ normal carrier presence in that part of the world from two to one. Although less visible, several government contractors have delayed hiring plans or have furloughed employees – creating an additional drag on the economy and potentially increasing the cost of many affected projects. Long-run planning and any associated cost savings go out the window when these companies are forced to react to the short-run machinations of federal budgeting.
Other recent construction-related economic news included:
- December total commercial construction spending: $885.0 billion (SAAR), +0.9% from November; +9.2% for the year. October and November numbers were revised up $8.0 billion and $11.0 billion, respectively; up 0.9% and 1.3% from their previously reported levels
- Nonresidential building construction spending: $301.0 billion, +1.0% from November; +5.6% for the year. October and November numbers were revised up $3.0 billion and $2.2 billion, respectively; up 1.0% and 0.8% from their previously reported levels. Manufacturing construction spending rebounded after two months of relatively weak growth to increase 2.5% in December. For the year, it was up 17.2%
- Heavy engineering construction spending: $269.4 billion, -0.5% from November; +7.4% for the year. November was revised up $2.3 billion, up 0.9% from its previously reported level. Power construction spending increased 1.4% in December and was up 24.9% for the year
- New residential construction spending: $176.4 billion, +1.4% from November; +19.6% for the year
- Private construction spending increased $12.0 billion (+2.0%) from November, its tenth consecutive monthly increase (November, which was initially reported as a $1.0 billion decline, was revised up $13.1 billion); +16.1% for the year
- Public spending fell $4.0 billion (-1.4%) in December; -2.7% for the year
- The AIA Billings Index fell from 53.2 in November to 52.0 in December. Despite the decline, the index remained above 50, indicating increased billings, a positive sign for future commercial construction. It was the fifth month in a row with a reading above 50.
- The December Producer Price Index (PPI) for building materials prices (does not include labor costs) rose 0.3% (SA) after rising 0.1% in November and was up 2.7% from December 2011.
- An index of prices for inputs to nonresidential construction declined 0.3% (NSA) in December following a 1.3% drop in November. On a year-over-year basis, the index was up 0.8%.