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Construction Economic Notes – March, 2013

03/28/2013 by Bernard M. Markstein

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Economic Overview
Recent economic data reports indicate a healthy United States economy despite numerous obstacles. The current strength follows a weak 2012 fourth quarter. Real (inflation-adjusted) gross domestic product (GDP) growth, which was originally reported as a 0.1% decline at a seasonally adjusted annual rate (SAAR), was revised up to a 0.4% increase. Although the quarterly performance is the weakest  since first quarter 2011, a small increase beats a small decrease. The slowdown from third quarter’s 3.1% growth rate was largely due to a significant drop in defense spending and an unexpected decrease in business inventories.

Much of the decline in defense spending appears to have been in anticipation of sequestration, the automatic across the board cuts in most federal spending. Sequestration did, in fact, go into effect on March 1. Although there may be further reductions in defense spending as a result of sequestration, they are unlikely to be as dramatic and concentrated as they were in the fourth quarter.

The reduction in inventories in the fourth quarter appears to be unintended, presumably due to greater than expected demand. Already, there are reports of inventory rebuilding, which is a boost to the economy in the short run.

The upward revision in the fourth quarter growth was largely due to the following:

  • Net exports, originally reported as reducing real GDP growth by 0.3%, were revised up significantly, adding 0.3% to growth
  • Residential construction jumped 17.6% from the third quarter, revised up from the previously reported 15.3%
  • Investment in nonresidential structures, originally reported as dropping 1.1% from the third quarter, was revised to a 16.7% increase

Politics and the Economy
The outcome that no one wanted has now come to pass—sequestration. Sequestration requires inflexible cuts that may well increase federal spending down the line. Recent action by Congress to provide funding for the federal government through fiscal year 2013 leaves sequestration in place with only a few modifications. Sequestration represents an unnecessary burden imposed on the U.S. economy by our politicians.

The pain from sequestration will be slow to build. Any furloughs are not likely to occur until April, due to the need to provide a 30-day notice to employees. However, many federal agencies and departments, as well as private suppliers, were making adjustments in advance of sequestration. Also, some are trying to implement cuts that will prevent furloughs, or at least limit them. Some government construction projects will be slowed, delayed, or not started. Thus, construction may be among the first industries to feel the fallout from sequestration. Smaller suppliers will feel the most pain. If left in place, as appears likely, sequestration will reduce real GDP growth by about 0.5% according to most reputable estimates.

Congress passed, and the president is expected to sign into law, a continuing resolution that provides funding for the federal government for fiscal 2013. Once again, this is kicking the can down the road. Thus, if nothing is done about federal spending and taxes, the need to do something will become pressing in September.

Before that occurs, the federal debt ceiling will need to be raised—another politician-created obstacle for the economy to overcome. The current, temporary ceiling expires mid-May. If the ceiling reverts to its lower level, most federal government operations will grind to a halt. The lower ceiling will also force the U.S. Treasury to delay numerous payments, including payments for Social Security and Medicare, federal payrolls, contractors, tax refunds, and debt payments (a technical default of U.S. government debt).

Employment
Nonfarm payroll employment increased a strong seasonally adjusted (SA) 236,000 jobs in February, almost double the less than spectacular 119,000 increase in January. For the past three months, employment gains have averaged an acceptable, though not overwhelming, 191,000 jobs per month. That at least is a little better than the 180,000 jobs per month average for the second half of 2012.

Construction Unemployment File

Construction employment increased for the ninth consecutive month, increasing 48,000 in February to 5,784,000 jobs—its highest level since September 2009. The not seasonally adjusted (NSA) construction unemployment rate was 15.7%, down from 17.1% in February 2012. Reports of spot labor shortages in construction are increasing.

Construction Spending
January total construction spending:  $883.3 billion (SAAR), -2.1% from December; +9.9% for 2012. November and December numbers were revised up $15.5 billion and $17.6 billion, respectively; up 1.8% and 2.0% from their previously reported levels. Most of the revision was due to a significant upward revision in power construction, +$19.1 billion for November and +$19.9 billion for December. Downward revisions in other categories partially offset the increases in power and other areas.

The total construction spending numbers incorporate the following:

  • Nonresidential building construction spending:  $297.3 billion, -1.6% from December; +5.7% for 2012. Among the few spending categories that did post an increase in January were retail and health care, both of which rose 0.7%
  • Heavy engineering construction spending:  $274.8 billion, -4.9% from December; +9.6% for 2012. November and December were revised up $17.7 billion and $19.7 billion, respectively, due to the large upward revision in power construction; up 6.5% and 7.3% from their previously reported levels
  • New residential construction spending:  $183.0 billion, +3.2% from December; +19.6% for 2012
  • Private construction spending plunged $16.6 billion (-2.6%) from December, ending ten consecutive monthly increases. However, November and December were revised up $15.2 billion and $16.0 billion, respectively (again largely due to revisions in power construction), up 2.5% and 2.6% from the previously reported levels. For 2012, private spending increased 17.1% over 2011
  • Public spending decreased $2.7 billion, -1.0% from December; down 2.6% for 2012

Other Construction Related Economic Developments
The February AIA Billings Index rose to 54.9 from 54.2 in January – its highest reading since November 2007. The index has now been above 50 for seven consecutive months. A reading above 50 indicates increased billings—a positive sign for commercial construction.

The February Producer Price Index (PPI) for building materials prices (does not include labor costs) was up 0.3% (SA) after increasing 0.5% in January and was up 2.4% (NSA) from February 2012.

An index of prices for inputs to nonresidential construction shot up 1.3% (NSA) in February after rising 0.6% in January. On a year-over-year basis, the index was up 1.7%.

Risks to the Economy and Construction
Major risks to the U.S. economy and, consequently, for commercial construction are:

  • Temporary federal debt ceiling expires in May with no resolution
  • Failure to provide funding for the federal government by the end of September
  • One or more major European countries default on their sovereign debt (a wake-up call just came from Cypress)
  • One or more countries abandon the euro
  • Oil prices increase significantly (roughly 50% a barrel or higher) for a sustained period (two months or longer)

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