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By Bassem Hamdy
October 17, 2016
This week we are approaching the lowest of highs in our national Construction Health Indicator (CHI) score. Although we are continuing to see recovery from the Great Recession, and confidence in the future of our industry amid economists, we are witnessing a small period of retraction brought on by rising material prices. On par with recent weeks, commodities (65) are weighing down our industry’s national health score to 80 – the lowest score seen in the past three months. Meanwhile, labor maintains at a respectable score of 90 and confidence in future investments is at 85.
According to the Bureau of Labor Statistics, construction material prices rose 0.3% between August and September, and they are 0.1% higher than September 2015. We are likely seeing this as a result of stabilized energy prices and wage inflation in the country. Rising strength in the U.S. dollar is helping to suppress more astronomical hikes in commodities and should continue to do so until the Federal Reserve begins talks about increasing interest rates for 2017.
Procore’s Chief Economist Anirban Basu says, “For roughly two years, declining energy prices had wrung much of the inflation out of the economy, allowing interest rates to remain low and the Federal Reserve to remain fixated on guiding the nation toward full employment. Energy prices are no longer falling. Moreover, wage and healthcare inflation are building, which could drive interest rates higher next year. That scenario is not good for real estate valuations and nonresidential construction.”
Although the labor score seems strong at 90, it does not give a great depiction of how the skilled labor shortage continues to be a concern for contractors. Figures for construction unemployment are lower than usual – the most recent observation is 15.4% higher than the all-time lowest value. However, the Associated General Contractors of America recently conducted a study that found that 69% of companies are having difficulty finding skilled workers to fill hourly positions. Due to supply and demand, 48% of these surveyed companies have increased pay for hourly craft workers — echoing reports of rising labor costs. As a result, contractor margins are tightening and backlog is increasing – leave firms struggling to make a profit.
In investments (85), an abundance of job opportunities, rising hourly wages, growth in private investments, and healthy consumer spending suggest that the nonresidential construction spending recovery is poised to continue. The multifamily residential building boom is making it difficult for nonresidential contractors to fill open positions – further contributing to rising construction costs. Basu says, “In many instances, purchasers of construction services continue to behave as if the buyers’ market for construction services remains in place. This has helped to produce flatter margins, with construction firm revenues unable to keep up with rising compensation costs.”
Overall, nonresidential construction fell for a second consecutive month. An ABC analysis of U.S. Census Bureau data shows seasonally adjusted, annualized spending of $687 billion in August, 1.1 percent and 1.3 percent lower than prior month and August 2015 levels, respectively. Four of the five largest nonresidential subsectors—power, highway and street, commercial and manufacturing—combined to fall 2.2 percent on a monthly basis in August 2016.
Regionally, the states that are seeing the most investments are California, Florida, Georgia, New York, and Hawaii. Denver topped the chart for construction jobs created while California’s Orange County came in second place for construction hiring as a local building boom created one-third of all new California construction jobs in the past year.
That’s all we have for now. Keep building and we’ll keep crunching the numbers. Check back here daily as numbers refresh and we’ll continue to translate this into meaningful digests that will help you make informed decisions all week long.
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Procore Construction Health Indicator
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