The Building Tradesman Newspaper

Friday, January 14, 2011

3 straight hikes in construction spending give hope to ‘fragile’ industry

By The Building Tradesman

Construction spending increased by 0.4 percent in November , the third straight rise in the total, the Associated General Contractors of America said Jan. 3 in an analysis of new Census Bureau data.

Private residential and public construction each gained 0.7 percent compared with October’s totals, while private nonresidential construction edged down 0.1 percent.

“It is heartening to see three increases in a row for the total,” said Ken Simonson, the association’s chief economist. “But most categories showed more of a seesaw pattern over the past three months, indicating that construction spending remains fragile at best.”

Simonson noted that the strongest category appears to be power construction, which has climbed for four consecutive months from a seasonally adjusted annual rate of $75.7 billion in July to $85.7 billion in November . He added that power construction will be helped in 2011 by extension of tax credits for building wind and other renewable power facilities. Residential improvements appear to have rebounded for the past three months also, up $15 billion since August. Simonson cautioned, however, that the Census Bureau often makes large revisions – down or up – to this estimate.

Public construction in November reached a 16-month high of $318.5 billion, but is likely to decrease in 2011, Simonson observed. Major federal funding for military base realignment, Gulf Coast hurricane work and stimulus projects is expected to taper off in the second half of the year. Meanwhile, the new Congress and many governors have signaled that they intend to hold down spending on infrastructure among other categories, the economist noted.

“Deferring needed improvements to our aging transportation network will undermine business activity today while saddling future taxpayers with ever-larger maintenance and repair costs,” said Stephen E. Sandherr, the association’s chief executive officer.

Meanwhile, prices for materials used in construction climbed 0.5 percent in November and 4.8 percent over the past 12 months, while price indexes for finished buildings remained flat over both time periods. That means that despite higher material prices, contractors were not able to pass on the costs to the customer.

“These price jumps, along with further increases since Producer Price Index data were collected in mid-November , could be the last straw for some hard-pressed contractors,” said Simonson. “With unemployment in construction running at 18.8 percent in November – double the all-industry average – any more business failures will only add to the industry’s misery.”

An AGC analysis released last month said “huge” jumps in prices for diesel fuel and copper – two key inputs to construction – pinched contractors in November as weak demand for construction forced them to hold down bid prices despite the cost increases.

Simonson noted that prices shot up 5.6 percent in November and 16 percent over the past 12 months for copper and brass mill shapes, 4.8 percent and 18 percent respectively for diesel fuel, and 3.5 percent and 14 percent for aluminum mill shapes.

“Since these data were collected in mid-November , prices have risen further for all of these materials, and steel makers have also announced hefty increases,” Simonson said. “Contractors have been unable to recoup these costs in what they charge.”

However, prices charged by concrete, roofing, electrical and plumbing contractors showed very small movements in either direction. Contractors are likely to be squeezed by rising materials prices and flat prices for completed projects for the foreseeable future, Simonson predicted. He forecasted that contractors would experience periods of simultaneous price spikes in multiple materials in 2011 as the U.S. and foreign economies pick up speed.

“Unfortunately, demand for construction will be erratic for months to come, worsening the price pinch that has already devastated too many firms and their workers,” Simonson said.