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Construction Economic Notes – October, 2012

10/12/2012 by Bernard M. Markstein

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Executive Summary

Major developments for commercial construction and the U.S. economy include:

  • Second quarter real (inflation-adjusted) gross domestic product (GDP) was revised down to 1.3% at a seasonally adjusted annual rate (SAAR) from 1.7%
  • September nonfarm payroll employment increased 114,000 on a seasonally adjusted (SA) basis. July and August increases were revised up from 141,000 and 96,000 to 181,000 and 142,000, respectively
  • The September unemployment rate fell to 7.8% (SA) from August’s 8.1%
  • The Bureau of Labor Statistics (BLS) released a preliminary report on its annual benchmark revision to nonfarm payroll employment. Total employment was revised up 386,000 (SA): private employment was 453,000 higher, but government employment was 67,000 lower. Construction employment was 85,000 higher, but manufacturing employment was 25,000 lower
  • According to the Census Bureau, August total commercial construction spending decreased 0.6% from July to $837.1 billion (SAAR), but was up 9.0% on a year-to-date basis from the same period last year. June and July spending were revised up a total of $10.5 billion
  • August nonresidential construction spending dropped 1.2% to $296.4 billion, although year-to-date spending was up 7.3% from a year ago. July numbers were revised up $1.1 billion, 0.4% higher than originally reported. Only two spending categories increased in August: health care (+0.4%) and public safety (+3.3%)
  • Manufacturing construction spending fell for the third month in a row, down 0.6% in August. Nevertheless, year-to-date spending was up 26.5% from the same period in 2011
  • Heavy engineering construction spending tumbled 1.4% in August to $260.8 billion, but was up 9.5% on a year-to-date basis compared to last year. Water and sewer construction spending was the only major category to increase in August, up 1.5%
  • New residential construction spending continued its upward movement for the fifth month in a row, soaring 2.9% in August to $160.0 billion. Year-to-date spending was up 14.8% from a year earlier
  • Private construction spending fell for the second month in a row, down $2.6 billion (-0.5%) from July. Year-to-date private spending was up 15.5% from the same period last year. July’s spending number was revised up $6.1 billion, 1.1% higher than originally reported
  • Public spending declined $2.3 billion, -0.8%, and was 2.1% lower year-to-date than in 2011. June and July spending numbers were revised up a total of $3.5 billion
  • The AIA Billings Index advanced for the third consecutive month to 50.2 from July’s 48.7, its highest reading since this past March. An index above 50 indicates increased billings, a positive sign for future commercial construction
  • The August Producer Price Index (PPI) for building materials prices (does not include labor costs) inched up 0.2% (SA) after falling 0.1% in July and was up 1.8% from August 2011
  • An index of prices for inputs to nonresidential construction rose 1.0% not seasonally adjusted (NSA) following three months of decreases. However, the index increased only 0.7% on a year-over-year basis. Given the recent increase in energy prices, expect building materials prices to move higher over the next few months

Some Additional Detail on Economic Developments

The United States economy advanced 1.3% (SAAR) in the second quarter, revised down from 1.7%, based on the Bureau of Economic Analysis (BEA) third estimate of real (inflation-adjusted) gross domestic product (GDP) growth. The effects of the drought on the economy and downward revision of nonresidential construction spending contributed significantly to the reduced growth estimate.

The September employment report provided a welcome shot of good news after several dismal reports. Nonfarm payroll employment increased a respectable 114,000 for the month. Also, the July increase was revised up from 141,000 to 181,000, and the August increase was revised up from 96,000 to 142,000. Meanwhile, the unemployment rate fell from 8.1% to in 7.8%. Unlike the most recent drops in the unemployment rate, this time both the number of employed and the size of the labor force increased.

This report is certainly good news and an indication that the economy did not stall in recent months. At the same time, the report must be kept in perspective. The average increase in nonfarm payroll employment for the July-September period was 145,700 per month. This number is decent, but is only in the upper range of the 100,000 to 150,000 increase necessary to absorb new entrants into the workforce and keep the unemployment rate from rising. The economy should be adding at least 200,000 jobs per month and preferably 300,000 to 400,000 on a consistent basis to reduce the large pool of unemployed workers.

Given the good, but still minimal, employment gain, why did the unemployment rate fall? Nonfarm payroll employment and the unemployment rate come from two different surveys. Nonfarm payroll employment is based on a survey of employers: the Current Employment Statistics (CES). Nonfarm payroll employment is an estimate of the number of jobs, based on reports from a large number of private and public employers. The unemployment rate is based on a survey of households: the Current Population Survey (CPS). Over time, the CES and CPS tend to agree, but may diverge in the short-run for a number of reasons:

  • The CES counts the number of jobs, whereas the CPS counts the number employed. For a person holding two jobs, the CES records two jobs; the CPS records one person employed
  • The CES does not count the self-employed; the CPS does
  • The CES estimates jobs from the creation of new businesses and adds new businesses to its survey twice a year. During a period when employment is recovering from an economic downturn, the CES often underestimates the number of jobs being created by new enterprises. (Conversely, in early stages of an economic downturn, the CES may overestimate the number of jobs in the economy.) The CPS would capture these jobs
  • The sample size of the CPS is much smaller than that of the CES. As a result, the CPS (and the unemployment rate) is subject to much greater volatility from month to month than the CES survey (and nonfarm payroll employment)
  • The CPS is a sample survey that is not revised. The CES is revised as additional reports are received. Revisions are made to the monthly jobs count in each of the two months following the initial report. Also, each year the CES undergoes a benchmark revision that “re-anchors” the survey based on more complete information—primarily using unemployment insurance data. This keeps the CES models in line with changes in employment trends

The benchmark adjustment this year included an upward revision of private employment that was 453,000 (+0.4%) higher, while government employment was revised down 67,000 (-0.3%). Construction employment was revised up 85,000 (+1.6%), but manufacturing employment was revised down 25,000 (-0.2%).

Putting the two surveys together suggests that the employment situation is improving, but we still have a long way to go. Nonfarm payroll employment has increased 4.3 million since the trough in employment in February 2010. At the same time, employment is still 4.5 million below its peak in January 2008. Meanwhile, according to the CPS, since January 2008 the labor force has increased by just under one million. That number would likely be even greater if employment prospects were better.

Given the volatility of the CPS, the drop in the unemployment rate in September to 7.8% could easily be reversed with the October survey.

Nonetheless, positive news beats negative news. The upward revision of both the recent payroll employment numbers and the preliminary benchmark revision—386,000 higher (+0.3%) for March 2012—is an indication of an improving economy. Historically, when the economy is improving, data revisions tend to be positive. Similarly, when the economic growth is falling, data revisions tend to be negative. September’s employment gain may turn out to be even higher than first reported.

Construction spending fell in August. However, the three component groups—nonresidential building, heavy engineering, and residential construction—were up on a year-to-date basis from the same period in 2011. Most of the major subcategories that make up these groups also were up on a year-to-date basis. Heavy engineering is struggling the most, due to reductions in government funding at all levels for maintenance and repair of infrastructure, as well as new projects.

New residential construction continues to be a positive. Both new single-family and multifamily construction spending have generally been increasing for over a year. Single-family construction spending rose 14.5% while multifamily spending was up 16.6% in August on a year-to-date basis.

In August, single-family housing starts jumped 5.5% to 535,000 (SAAR) from July’s 507,000. This marks the fifth month in a row that single-family starts exceeded 500,000. Although single-family housing permits did not change from July, they were 20.3% higher than a year ago on a year-to-date (NSA) basis.

For the sixth consecutive month, the 10-city and 20-city July S&P/Case-Shiller® Home Price indexes were up, both 0.4% (SA) higher than in June. Meanwhile, the 10-city index rose 0.6%, and the 20-city index increased 1.2% on a year-over-year (NSA) basis. Higher home prices improve confidence among prospective home buyers and raise the willingness of lenders to issue mortgages and to extend loans to builders.

August new single-family home sales declined 0.3% to 373,000 (SAAR) following a 3.6% surge to 374,000 the previous month, while increasing 22.5% on a year-to-date (NSA) basis for the same period in 2011. Meanwhile, the inventory of new single-family homes for sale remained at July’s record low 141,000. Given the low level of inventories, builders will have to respond to higher demand with new construction.

Multifamily housing starts dropped 4.9% in August to 215,000 (SAAR) after jumping 4.1% to 226,000 the month before. The 3-month moving average, which smoothes out the sharp monthly fluctuations and provides a better picture of the underlying trend, advanced 3.5% to 219,000. Multifamily starts increased 36.8% on a year-over-year (NSA) basis. The 3-month moving average for multifamily building permits in August decreased 0.3% to 287,000 from July’s 288,000. Year-to-date (NSA), permits were up 41.6%.

The United States economy and commercial construction continue to face significant risks, which include:

  1. Sovereign debt default by a Euro Zone country. The European Central Bank (ECB) has reduced this risk by indicating a willingness to buy member countries’ short-term government debt when reasonable open-market rates are unavailable
  2. Falling off the fiscal cliff(the Bush era tax cuts expire as of January 1, 2013) unless Congress addresses the issue
  3. Federal debt approaching the debt ceiling in early 2013, with no moves to date by Congress to raise the ceiling
  4. A huge spike (50% or more) in oil prices for a prolonged period

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