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Construction Health Update: Global and Federal Policies Contribute to a Four Point Dive


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As of Monday, December 19 our national Construction Health Indicator score is 83.2 – a four point dive from last week. 

  • The strongest contributor is Investments are down 5 points to 95.

  • The national Labor score is solid at 91. 

  • The National Commodities & Materials Indicator is down five points from last week, at 64.

This week the construction industry is feeling the residuals of events that took place in global and federal politics this past month. Materials and commodities prices are up due to OPEC’s new oil production limits. The Federal Reserve increased interest rates by 25 basis points which is affecting the housing market. Meanwhile, investments are finally settling after the U.S. election.

Investments

Last week the U.S. Census Bureau reported that construction spending in October rose by 0.4 percent. This slow rate of improvement is satisfactory when compared to October 2015 – showing an increase of 3.4 percent overall. In this uptick, groundbreakings contributed an estimated total of $972.2 billion.

In the residential sector, housing starts fell 18.7 percent last month to a seasonally adjusted 1.09 million, according to the Commerce Department. Likewise, building permits fell 4.7 percent to an annual rate of 1.20 million. The plunge was mostly felt in the Northeast and West, while falling at less dramatic rates in the Midwest and South.

This decline likely reflects a natural regression after home construction soared 27 percent to 1.34 million homes in October, the highest level since July 2007.

If you specialize in residential construction, keep an eye out for a slight downturn in 2017. On the expectation of tax cuts, regulatory changes and higher budget deficits under President-elect Donald Trump, the yield on 10-year U.S. Treasury notes have risen – making the cost of borrowing more expensive for potential homeowners. 

However, consumer confidence is still high despite the potential setback of rising mortgage rates. The National Association of Home Builders/Wells Fargo builder sentiment index reached its highest point in 11 years. The index climbed seven points for December to a reading of 70 (any figure above 50 indicates that builders view sales conditions as positive).

Meanwhile in the public sector, total spending rose 2.8% compared with September. This is attributed to spending on educational facilities (up 4.1%) and public residential construction (up 11.9%) in November. With the president-elect’s proposed $1 trillion investment plan, these numbers are likely to increase drastically in 2017. 

Labor 

According to the Associated Builders and Contractors (ABC), the U.S. construction industry added 19,000 net new jobs in November and has now added jobs for three consecutive months. Industry employment is up by 2.4 percent. This is considerably faster than the overall economy’s 1.6 percent job growth rate. Unfortunately, there are still around 200,000 unfilled construction jobs in the United States, an 81 percent increase in the last two years.

Infrastructure projects need highly trained workers, such as heavy equipment operators and iron specialists. But as a result of the 2007-2008 recession, which caused an estimated 25 percent of construction jobs to vanish, their ranks have thinned. 

This shortage of skilled workers is driving up construction costs. Most notably the average hourly wage has increased an astonishing 11.6 percent from the all time average during November 2016. 

With a series of Federal Reserve interest rate increases on the horizon — the first of which came Wednesday — combined with higher wages and building costs, Procore’s Chief economist Anirban Basu said contractors should be "extremely careful in bidding on projects."

Commodities & Materials 

Construction material prices fell 0.5 percent between October and November, according to an Associated Builders and Contractors analysis of Bureau of Labor Statistics data released Wednesday. However, prices year-over-year were up 0.5 percent.

In November, Saudi officials and OPEC, agreed to a major deal to limit oil production to 32.5 million barrels per day — down from its current levels of 33.7 million barrels of oil per day.

It’s a joint effort by some of the world’s biggest oil producers to see if they can hike global crude oil prices by artificially throttling production. If all these promised supply cuts actually materialize they’ll eliminate much of the glut in the oil market that’s persisted for two years, the International Energy Agency said this week.

As a result, energy prices are likely to rise in the near future and along with it materials prices will begin cutting into contractors' bottom lines.

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.

Click here for recaps from Construction Health Updates from past weeks.

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