1 Contact: Steve Essig, PE, CCP, Execuve Vice President, 850-389-8120, www.moca-pm.com Impact on selling price: Lower - Higher - Neutral - Recent Findings The Architecture Billings Index (ABI) was posive in July for the sixth consecuve month, and tenth out of the last twelve months as demand across all project types connued to increase. The American Instute of Architects (AIA) reported the July ABI score was 51.5, down from the mark of 52.6 in the previous month. This score sll reflects an increase in design services (any score above 50 indicates an increase in billings ). 1 U.S. new-home sales posted their strongest month in more than eight years in April, while prices jumped to a record level, suggesng healthy demand alongside limited supplies across the housing market . 2 As has been the case for many months, the most significant sources of weakness in construcon acvity are hiring related to public spending. Not only did this segment shed jobs in June, but employment in this sector is slightly less than it was a year ago . 3 The value of nonresidenal construcon starts, not seasonally adjusted, increased 16% year-to-date (YTD) for January- May combined, compared with the same months of 2015, ConstructConnect (formerly CMD, Reed Construcon Data) reported on Wednesday, based on data it collected. The value of nonresidenal building starts rose 21% YTD . 4 The dollar value of total construcon put-in-place showed a seasonally adjusted annual escalaon rate of 4.5% in April, down from 8.0% in March and 10.3% in February, according to the U.S. Department of Commerce . 5 The dollar value of new construcon starts in New York was running 34.3% above a year ago in December, according to Dodge Data & Analycs. The non-residenal building sector got a huge boost from the office building market, which was up 149% from a year ago. Housing construcon was up 49% for the year . 6 Firms have reported delaying hiring, pung off investments or reducing new equipment orders. Small business owners’ concerns about the future U.S. president are compounded by a shaky economy, a sharp slowdown in oil and gas investment, and the possibility of future interest rate increases . 7 The U.S. economy is bouncing back from a lackluster start to the year, driven by a resurgence in consumer spending despite warning signals from American businesses and uncertainty in global markets . 8 The PPI for new nonresidenal building construcon—a measure of the price that contractors say they would charge to build a fixed set of five categories of buildings—also rose 1.9% y/y. Changes ranged from 1.7% y/y for healthcare construcon to 1.8% for office buildings, 1.9% for schools and industrial buildings, and 2.7% for warehouses . 9 1RQ5HVLGHQWLDO &RQVWUXFWLRQ 3XW LQ 3ODFH &,3 -XQ ,Q %LOOLRQV Construcon recovery from the Great Recession appears to have peaked at around $410 billion.10 Materials important to construcon that had notable one-or 12-month price changes include diesel fuel, up 18% for the month but down 28% y/y; copper and brass mill shapes, 2.0% and -16%, respecvely; aluminum mill shapes, 1.1% and -7.9%; asphalt paving mixtures and blocks, -2.6% and -7.6%; and steel mill products, 4.6% and -5.2%. More price hikes for various construcon materials appear likely.11 The market’s message: While CIP is at record levels, that may not be sustainable. Construcon growth appears to be slowing (demand – three straight months of declining ABI) with material and labor costs to contractors rising. This should result in slower rate of selling price escalaon – but connued price growth. TODAY’S CONSTRUCTION ECONOMY Third Quarter 2016 This quarter’s newsleer highlights recent findings, current labor supply issues and economic forecasts for our public sector clients. Our focus is on those issues that impact construcon selling price. Although incremental changes in material and labor costs have an impact on the price of construcon, market condions and pricing strategy are always the primary drivers of selling price to owners.
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1Contact: Steve Essig, PE, CCP, Executive Vice President, 850-389-8120, www.moca-pm.com
Impact on selling price: Lower - Higher - Neutral -
Recent FindingsThe Architecture Billings Index (ABI) was positive in July for the sixth consecutive month, and tenth out of the last twelve months as demand across all project types continued to increase. The American Institute of Architects (AIA) reported the July ABI score was 51.5, down from the mark of 52.6 in the previous month. This score still reflects an increase in design services (any score above 50 indicates an increase in billings).1 U.S. new-home sales posted their strongest month in more than eight years in April, while prices jumped to a record level, suggesting healthy demand alongside limited supplies across the housing market.2 As has been the case for many months, the most significant sources of weakness in construction activity are hiring related to public spending. Not only did this segment shed jobs in June, but employment in this sector is slightly less than it was a year ago.3 The value of nonresidential construction starts, not seasonally adjusted, increased 16% year-to-date (YTD) for January-May combined, compared with the same months of 2015, ConstructConnect (formerly CMD, Reed Construction Data) reported on Wednesday, based on data it collected. The value of nonresidential building starts rose 21% YTD. 4 The dollar value of total construction put-in-place showed a seasonally adjusted annual escalation rate of 4.5% in April, down from 8.0% in March and 10.3% in February, according to the U.S. Department of Commerce.5 The dollar value of new construction starts in New York was running 34.3% above a year ago in December, according to Dodge Data & Analytics. The non-residential building sector got a huge boost from the office building market, which was up 149% from a year ago. Housing construction was up 49% for the year.6 Firms have reported delaying hiring, putting off investments or reducing new equipment orders. Small business owners’ concerns about the future U.S. president are compounded by a shaky economy, a sharp slowdown in oil and gas investment, and the possibility of future interest rate increases.7
The U.S. economy is bouncing back from a lackluster start to the year, driven by a resurgence in consumer spending despite warning signals from American businesses and uncertainty in global markets.8The PPI for new nonresidential building construction—a measure of the price that contractors say they would charge to build a fixed set of five categories of buildings—also rose 1.9% y/y. Changes ranged from 1.7% y/y for healthcare construction to 1.8% for office buildings, 1.9% for schools and industrial buildings, and 2.7% for warehouses.9
Construction recovery from the Great Recession appears to have peaked at around $410 billion.10 Materials important to construction that had notable one-or 12-month price changes include diesel fuel, up 18% for the month but down 28% y/y; copper and brass mill shapes, 2.0% and -16%, respectively; aluminum mill shapes, 1.1% and -7.9%; asphalt paving mixtures and blocks, -2.6% and -7.6%; and steel mill products, 4.6% and -5.2%. More price hikes for various construction materials appear likely.11
The market’s message: While CIP is at record levels, that may not be sustainable. Construction growth appears to be slowing (demand – three straight months of declining ABI) with material and labor costs to contractors rising. This should result in slower rate of selling price escalation – but continued price growth.
TODAY’S CONSTRUCTION ECONOMY Third Quarter 2016
This quarter’s newsletter highlights recent findings, current labor supply issues and economic forecasts for our public sector clients. Our focus is on those issues that impact construction selling price. Although incremental changes in material and labor costs have an impact on the price of construction, market conditions and pricing strategy are always the primary drivers of selling price to owners.
2Contact: Steve Essig, PE, CCP, Executive Vice President, 850-389-8120, www.moca-pm.com
The Labor EnigmaThe National Association of Home Builders reported in its “Eye on Housing” blog on Tuesday (21 June), “A survey of single-family builders conducted by NAHB in June 2016 shows that shortages of labor and subcontractors have become more widespread than they were a year ago. The questions have covered nine key trades in a consistent way since 1996. Averaged across the nine trades, the share of builders reporting either some or a serious shortage has skyrocketed from a low of 21% in 2012, to 46% in 2014, 52% in 2015, and now 56% in 2016. 12
Given the recent rise in oil prices, construction industry stakeholders may be speculating that some workers may have left the industry for the energy production sector. 13
Despite a broader U.S. labor market rebound in June, the construction industry failed to add jobs for a third consecutive month. 14 There were 210,000 open construction sector jobs, seasonally adjusted, at the end of March, BLS reported on May 10 in its latest Job Openings and Labor Turnover Survey. That was the highest total since May 2007.15 Securities research firm Thompson Research Group on April 12 released its quarterly building products survey of select manufacturers and distributors. A common theme from all contacts was a tight labor market along the value chain (truck driver shortages to drywall installers).16
The construction industry unemployment rate declined to 4.6 percent in June from 5.2 percent the previous month, but not for the right reasons”, said Anirban Basu, ABC’s chief economist. The overall national unemployment rate rose in June as labor force participation edged higher. However, the size of the construction industry labor force shrank.17 Ken Simonson, AGC’s chief economist, said in a statement that the low construction jobless rate and gains in hourly earnings and weekly hours worked “suggest there is a dearth of qualified workers to hire, not a deliberate pullback in hiring.18 The number of unemployed jobseekers who last worked in construction declined from 652,000 in April 2015 to 530,000, and the unemployment rate for such workers dropped from 7.5% to 6.0%, the lowest April figures since 2000.19 The rise in weekly hours and the decrease in the number of unemployed construction workers to a 16-year low suggest contractors may have been unable to hire experienced workers and instead had their existing employees work longer.20 Seasonally adjusted construction employment rose in 42 states and the DC area from April 2015 to April 2016, declined in six states and held steady in New Mexico and Mississippi, an AGC analysis of Bureau of Labor Statistics (BLS) data released on May 20 showed. California added the most jobs (49,800 jobs, 7.0%), followed by Florida (30,100, 7.1%) and Massachusetts (13,900, 10%).21
The Market’s Message: Construction unemployment is at historic lows, but that is not a result of more jobs. Workers appear to be leaving the industry, resulting in skilled labor shortages, risks to contractors and price increases to owners. There continue to be construction job vacancies in all parts of the nation.
Projections and ForecastsEconomic gauges released Tuesday [17 May] showed a pickup in industrial output, continued momentum in the housing sector and firming inflation all point to stronger – though still unspectacular – growth in the second quarter. That joined other recent data showing a rebound in retail sales, rising consumer confidence and continued job gains.22 While the stock market has recovered much of the ground lost earlier in the year, forecasters in The Wall Street Journal’s monthly survey of economists trimmed their estimates for employment gains and economic growth as market volatility and signs of cautious consumers leave the economy stumbling.23 With 38 percent of our leading indicators on an upward trend for the second straight month, our Business-Cycle Conditions model is showing the first back-to-back readings below 50 since January-February 2007. AIER economists believe the latest data suggest that the economy remains at an elevated risk of recession.24
The Market’s Message: There are storm clouds on the horizon. While consumer spending is strong, other indicators signal recession; and when the economy falls into recession, construction is hit doubly hard – good for buyers, bad for sellers.
Final ThoughtsThe jobs picture is confounding; while construction employers indicate large vacancies, workers are not filling those. And while CIP is at record levels, it appears to have peaked and may fall more quickly as jobs remain unfilled and other economic indicators point to recession. Because construction tends to lag the greater economy, price escalation will taper off and the industry could experience a downturn in early 2018 or sooner.
Sources1 AIA Press Release, Washington, DC Aug 17, 20162 Sparshott, Jeffrey, “New Home Sales Hit Best Pace Since 2008”, WSJ, 25 Jun 2016, p. A2.3 Lowe, Francis, posted blog on www.abc.org, 8 July 2016.4 Simonson, Ken; Data Digest, Vol. 16, No. 23 · June 17-23, 2016.5 ENR, Construction Economics, June 20 2016, p. 68.6 ENR, Construction Economics, May 23 2016, p. 112.7 Simon, Ruth, “Small Business Wary of Election”, WSJ, 23 Jun 2016, p. B1.8 Sparshott, Jeffrey, “Consumer Spending Gives Economy a Lift”, WSJ, 30 Jun 2016, p. A2.9 Simonson, Ken; Data Digest, Vol. 16, No. 17 · April 25-29, 2016.10 http://www.census.gov/construction/c30/c30index.html11 Simonson, Ken; Data Digest, Vol. 16, No. 22 · June 10-16, 2016.12 Leubsdorf, Ben, “Fed’s Being Book Sees Rising Wages”, WSJ, 2 Jun 2016, p. A6.13 Lowe, Francis, posted blog on www.abc.org, 8 July 2016.14 Lowe, Francis, posted blog on www.abc.org, 8 July 2016.15 Simonson, Ken; Data Digest, Vol. 16, No. 19 · May 7-20, 2016.16 Vol. 16, No. 17 · April 19-22, 2016.17 Lowe, Francis, posted blog on www.abc.org, 8 July 2016.18 Ibid, p. 2.19 Simonson, Ken; Data Digest, Vol. 16, No. 18 · May 2-9, 2016.20 Simonson, Ken; Data Digest, Vol. 16, No. 18 · May 2-9, 2016.21 Simonson, Ken; Data Digest, Vol. 16, No. 20 · May 23-June 2, 2016.22 Leubsdorf, Ben, “Growth Stages Spring Revival”, WSJ, 18 May 2016, p. A2.23 Zumbrun, Josh, “Economists Reduce Estimates for GDP, Job Growth”, WSJ, 8 Apr 2016, p. A2.24 AIER, May 2016, Vol 3, Issue 5, p.3.
