sorting out the outlook for construction and materials
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Sorting Out the Outlook for Construction and Materials. Transportation Estimators Assn., St. Louis Prepared October 3, 2007 Ken Simonson Chief Economist Associated General Contractors of America [email protected]. Current economic influences. Moderate real GDP growth (2-3%) - PowerPoint PPT PresentationTRANSCRIPT
Sorting Out the Outlook for Construction and Materials
Transportation Estimators Assn., St. Louis Prepared October 3, 2007
Ken SimonsonChief Economist
Associated General Contractors of [email protected]
Current economic influences
• Moderate real GDP growth (2-3%)
• Low inflation (CPI change 1.5-2.5%)
• Moderate job growth, low unemployment (avg. 150,000 jobs/mo., 4.6% unem rate)
• Rising real wages, personal income (2%)
• Worries about housing, credit, falling dollar
The shifting construction market
Segment 2006 8/07Total (tril. $, SAAR) $1.19 $1.17% of total
Private residential 54% 45%New SF 35 26New MF 4 4Improvements 14 15
Private nonres. 25 30Public 21 25
Current housing situation
• Aug. spending: -1.5% vs. Julye, -17% vs. 8/06• Aug. permits: -5.9% vs. July, -24% vs. 8/06• Aug. starts: -2.6% vs. July, -19% vs. 8/06• Aug. new-home sales: -8% vs. July, -21% vs.
8/06• Aug. jobs: -23,000 vs. July, -155,000 vs. 8/06• Inventories, time on market remaining high
Single-family (SF) vs. multifamily (MF)
• Aug. construction spending (value put in place):SF: -3.3% vs. July, -26% vs. 8/06 MF: -0.3% vs. July, -5.3% vs. 8/06
• August housing starts :SF: -7.1% vs. July, -27% vs. 8/06MF: +13% vs. July, +14% vs. 8/06
• August building permits :SF: -8.1% vs. July, -28% vs. 8/06MF: unchanged vs. July, -15% vs. 8/06
Housing outlook
• SF: No end yet to decline in permits, starts or spending
• Don’t expect upturn before middle of ‘08
• MF: Rental construction cushioned the fall in condo starts but now many owners are trying to rent out houses and condos
• Rate cut helps some buyers/homeowners but won’t cure credit fraud worries
Nonres ’06 totals, shares, ’07 YTD change
Nonresidential total $545 billion 100% +14%
Educational $86 billion 16% +14%Commercial $76 billion 14% +15%Highway & street $72 billion 13% + 5%Office $55 billion 10% +21%Healthcare $40 billion 7% +15%Power $39 billion 7% +22%Manufacturing $34 billion 6% + 6%Transportation $27 billion 5% +11%Sewage & waste disposal $23 billion 4% + 6%Communication $21 billion 4% +20%Amusement & recreation $18 billion 3% + 9%Lodging $18 billion 3% +64%Other 7% (water; public safety; religious; conservation)
Nonresidential segments
(listed in descending order of public +
private spending in 2006)
• Jan-Aug ’07 year-to-date (YTD) share and growth from Jan-Aug ’06 to Jan-Aug ‘07
• Major influences
• Outlook for ’07 and ’08
Educational
• 16% of public + private nonres. spending YTD; YTD change Jan-Aug ‘06 to Jan-Aug ‘07: 14%
• Falling primary school enrollment; rising high-school, college, continuing ed
• K-12 affected by property taxes, house values• Private school/college spending affected by
stock market (through endowment return, gifts)• 2007 forecast: 9-11% (record bond issues in ‘06;
momentum from 2005-06 revenues; stock gains)• 2008 forecast: 3-6% (slower revenue growth)
Commercial (retail, warehouse, farm)
• 14% of YTD total; 15% YTD growth • Led by multi-retail (gen. merchandise, shopping
centers, malls), 16% YTD growth• Neighborhood retail follows new housing; other
segments affected by home sales or remodeling: furniture, appliance, yard/garden sales
• 2007: +8-10% (personal income still rising but less new local, auto-, and housing-related)
• 2008: +4-7% (expanding GDP but tighter credit)
Highway and street
• 12% of YTD total; 5% YTD growth
• Boosted by 8/05 passage of SAFETEA-LU
• CBO projects big deficit starting 10/08
• 2007: +5-8% (flatter fuel tax receipts, slight relief on materials costs)
• 2008: 0-5% (depends on receipts, costs)
Office
• 11% of YTD total; +21% YTD growth• Rebound from weak 2001-05• Vulnerable to reduced demand from RE
agents, mortgage brokers, title companies• Tighter credit; large-firm mergers, job cuts
threaten many large-office markets• 2007: +10-14% (leveling of vacancy rates,
modest job growth)• 2008: +0-5% (’06 projects end, fewer new)
Power
• 8% of YTD total; +22% YTD growth
• Private electric power has ended 5-year slump: +22% YTD growth; public +26%
• New plants, transmission lines; retrofits
• Wind, solar growing but from small base
• 2007: +20% (retrofits, new plants, alternatives)
• 2008: more of the same (+15-25%)
Healthcare (hosp., med. bldg., special care)
• 7% of YTD total; +15% YTD growth
• Led by private hospitals, 16% YTD growth
• Technology, new housing driving hospital (re)construction; seismic retrofit in CA
• Budget constraints, decline of employer-funded care may slow hospital demand
• 2007: +12-15%
• 2008: +10-15%
Manufacturing
• 6% of YTD total; +6% YTD growth
• Catching up from 1998-2004 slump
• Strong shipments, high capacity utilization
• Long lead times on refineries, mining, cement plants; aircraft, heavy equipment
• 2007: +5-10% (less automotive, pharma; more export-oriented plants, foreign inv.)
• 2008: 4-8% (big jobs continue; fewer new)
Transportation facilities
• 5% of YTD total; +11% YTD growth
• Driven by growth in passengers & freight
• Slower economic growth in 2007 implies less expansion
• 2007: +5-8% (trucking, rail slowdown)
• 2008: +5-8% (more airport, port work)
Lodging
• 5% of YTD total; +64% YTD growth
• Driven by higher room and occupancy rates; likely to flatten by end of ‘07
• Rebound from 2000-01 recession, post-9/11 travel slump
• 2007: +40-60% (more growth in business, leisure, foreign travelers)
• 2008: -5 to +5% (depends on credit)
Communication
• 4% of YTD total; +20% YTD growth
• Carriers consolidating but also upgrading
• 2007: +15-20%
• 2008: +10-15% (same trends continue)
Sewage & waste disposal
• 4% of YTD total; +6% YTD growth
• Housing slump means fewer new lines
• Major plant and CSO upgrades
• 2007: +4-6%
• 2008: +1-5% (continued housing impact)
Amusement & recreation
• 3% of YTD total; +9% YTD growth
• Very diverse: sports venues, playgrounds, parks, convention centers, theaters
• 2007, 2008: ? (big stadium projects, bond issues passed in 2006 but flatter public revenues)
Materials and components
• Higher increases until recently for construction inputs than for overall economy:
12 mo. to: 12/04 12/05 12/06 8/07Const PPI 9.1% 8.2% 4.6% 1.6%CPI-U 3.3% 3.4% 2.5% 2.5%• Higher cumulative change from 12/03 to 8/07:Const PPI 28%CPI-U 13%• PPI drivers: steel, gypsum, diesel, asphalt,
concrete, copper, plastics, aluminum, wood
95
100
105
110
115
120
125
130
12/03 12/04 12/05 12/06
Perc
ent of
12/
03 L
evel
CPI-U PPI for Finished Goods Inputs to Construction Industries
Cumulative Change in Consumer, Producer & Construction Prices(All PPIs = 100 in 12/03)
08/07
90
100
110
120
130
140
150
12/03 12/04 12/05 12/06
Per
cent of 12/0
3 L
evel
CPI-U Highway & Street Construction
Other Heavy Construction Nonresidential Buildings
Multi-Unit Residential
Cumulative Change in PPIs for Construction Types(All PPIs = 100 in 12/03)
08/07
75
100
125
150
175
200
225
250
275
12/03 12/04 12/05 12/06
Perc
ent of
12/
03 L
evel
CPI-U #2 Diesel Fuel Asphalt Paving Mixtures & Blocks Concrete Products
Cumulative Change in PPIs for Selected Highway Inputs(All PPIs = 100 in 12/03)
08/07
90
100
110
120
130
140
150
160
170
12/03 12/04 12/05 12/06
Perc
ent of
12/
03 L
evel
CPI-U Plastic Construction Products
Gypsum Products Lumber & Plywood
Cumulative Change in PPIs for Selected Building Inputs(All PPIs = 100 in 12/03)
08/07
75
100
125
150
175
200
225
250
275
12/03 12/04 12/05 12/06
Perc
ent of
12/
03 L
evel
CPI-U Steel Mill Products
Copper & Brass Mill Shapes Aluminum Mill Shapes
Cumulative Change in PPIs for Selected Metal Products(All PPIs = 100 in 12/03)
08/07
Outlook for materials (3-6 months)
• Falling prices: wood, gypsum products; perhaps plastics
• Likely to rise: diesel, asphalt, copper
• No shortages but longer lead times for some items
• Year-over-year PPI change: 3-5%
Outlook for materials (1-5 years)
• Construction remains dependent on specific materials
• Same materials in demand worldwide, with uncertain supply growth (e.g., copper, oil)
• Construction requires physical delivery
• Thus, industry is subject to price spurts, transport bottlenecks, fuel price swings
• Expect 6-8% PPI increases, higher spikes
Construction labor costs, availability
Average hourly earnings, 8/06-8/07: +4.5%• Construction employment change: -1.2%
-Residential construction : -4.5%(residential building & specialty trades)
-Nonresidential construction: +1.5%(nonres building & specialty trades,
heavy & civil engineering const.)• Architectural, engineering services: +2.9%• Nonfarm total: jobs +1.3%, wages +3.9%
Construction labor outlook (12/07 vs. 12/06)
• ‘Official’ rise in nonres. employment: 2-4%
• ‘Official’ decline in res. employment: 4-6%
• + 400-500K ‘res’ specialty trades in nonres
• = Actual nonres. employment rise: 11-16%
• Actual res. employment loss: 16-20%
• Wage increase: 5% (partly due to greater proportion of nonres., hence higher-paid)
Summary for 2007
• Total const. spending: -6% to -3%
Res: -15% to -20% (huge drop in new SF; MF and improvements down slightly)
Nonres: +10-15% (led by energy & power,hospitals, lodging)
• Materials costs: +3-5% Dec.-Dec.
• Labor costs: +4.5-5.5% Dec.-Dec.
Summary for 2008
• Total construction spending: +1-5%
Res: +1-3% (turnaround after mid-2008)
Nonres: +3-7% (led by energy & power,hospitals; weaker highways, lodging)
• Materials costs: +6-8%
• Labor costs: +5-6%
AGC Economic Resources (sign up by email to [email protected])
• The Data DIGest: weekly one-page email
• PPI tables: emailed monthly
• Construction Inflation Alert: Oct. & March
• Audioconferences: Dec. & June
• State-specific emails (timing varies) and
fact sheets: www.agc.org /factsheets
Ken SimonsonChief Economist
Associated General Contractors of [email protected], 703-837-5313