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Construction Economic Notes – June, 2013

06/28/2013 by

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Economic overview
The U.S. economy continues to forge ahead despite numerous hindrances to growth. Among the impediments is the expiration of the Social Security payroll tax holiday at the end of last year, which resulted in an additional 2% tax on income and, consequently, a reduction in take-home pay. Meanwhile, the drag from the $85 billion reduction in government spending caused by sequestration has become more evident and widespread.

The bad spring weather across much of the country may be responsible for the slowing of both residential and nonresidential construction activity. If the slowdown was indeed weather-related, construction activity should pick up as builders and developers get back on schedule.

The outlook for residential construction remains excellent. Residential construction drives demand for many goods and services—both immediately and, as people move into new homes, subsequently. The immediate effect is to increase demand for materials and goods from lumber and cement to dishwashers and stoves. Manufacturing is benefiting already from the increase in residential construction. Most notably, automobile companies are seeing increases in sales of pickup trucks, which are leading to increases in the demand for manufactured goods that go into truck production. Many manufacturers are expanding their production facilities, increasing nonresidential construction activity.

Roughly 18 to 24 months after people move into newly-built homes, construction on retail and office space tends to pick up. Demand for goods and services from the new residents (from groceries to hair care) drives this construction activity.

Employment
Nonfarm payroll employment increased a solid, if unspectacular, 175,000 seasonally adjusted (SA) jobs in May, following a gain of 149,000 in April (revised down from an increase of 165,000 jobs). The U.S. economy has added 6.3 million jobs since the most recent low in employment in February 2010—still 2.4 million jobs below the January 2008 employment peak.

Meanwhile, the May SA unemployment rate rose 0.1% to 7.6%. Although not too much should be read into a single month, at this stage, any increase is positive if for the “right” reasons. In this case, the increase was for the right reason. The number of people seeking jobs is increasing faster than the number of people finding jobs — an indication people believe their chances of finding a job have improved.

May SA construction employment rose by 7,000 jobs, the eleventh increase over the past 12 months. April construction employment, originally reported as a loss of 6,000 jobs, was revised to a 2,000 decrease. The not seasonally adjusted (NSA) construction unemployment rate for May was 10.8%, down from 14.2% in May 2012. Reports of spot labor shortages in construction, especially for skilled labor, continue to pile up.

Construction Spending
April total commercial construction spending was $860.8 billion (SAAR), +0.4% from March; +4.5% year-to-date NSA compared to the same period in 2012.

April SA construction employment fell by 6,000 jobs, the first decline following 10 months of increases. The decline in construction jobs was due to a drop in nonresidential construction employment, which was down over 19,000 jobs and only partially offset by increases in residential construction employment. The not seasonally adjusted (NSA) construction unemployment rate was 13.2%, down from 14.5% in April 2012. Reports of spot labor shortages in construction, especially for skilled labor, are increasing.

Construction spending
March total commercial construction spending was $856.7 billion (SAAR), -1.7% from February and +4.7% year-to-date NSA compared to the same period in 2012.

The total construction spending numbers incorporate the following:

  • Nonresidential building construction spending: $288.3 billion, -1.4% from March; -1.1% year-to-date from 2012. Upward revision in the manufacturing construction spending numbers for February and March turned those two months from a negative to a positive, +1.1% and +0.5%, respectively. April was down 2.6% from March, but on a year-to-date basis, manufacturing was still up 6.7% compared to the same period a year ago
  • Heavy engineering construction spending: $264.1 billion, +3.0% from March; -1.4% year-to-date from 2012. There was a significant downward revision of power construction spending numbers for February and March—revised down $12.4 billion and $12.3 billion, respectively, or -12.3% and -12.5% of their previously reported values. Power construction spending is the largest category of heavy engineering spending, representing roughly a third of the total
  • New residential construction spending: $200.8 billion, +1.5% from March; +37.5% year-to-date from 2012
  • Private construction spending increased $6.1 billion (+1.0%) from March; +8.9% year-to-date from 2012
  • Public spending decreased $3.0 billion (-1.2%) from March; -4.8% year-to-date from 2012

Other construction spending developments
The May AIA Architecture Billings Index (ABI) rebounded strongly from April’s decline, up over 4 points to 52.9 from 48.6. That puts the index one point above the 51.9 from March. A reading above 50 indicates increased billings — a positive for future commercial construction. The ABI has been above 50 for nine of the last ten months.

The May Producer Price Index (PPI) for finished goods rose 0.5% (SA) following a 0.7% decline in April. On a year-over-year NSA basis, the May PPI was up 1.7%.

A price index for inputs used in nonresidential construction, excluding capital equipment, advanced 0.2% (NSA) in May after decreasing 0.1% in April. The NSA index was 0.3% higher than in May 2012, while inputs for residential construction were 1.6% higher over that same period.

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