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Construction Health Update: Investments Score Reaches Perfection


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As of Monday, December 5 our national Construction Health Indicator score is 85.7 – a two point increase from last week. 

The national Construction Health Indicator’s Investments score has reached perfection. Housing starts have increased an astonishing 25%, but is being overshadowed by industry confidence in private investments. 

Investments

The nonresidential spending outlook for 2017-18 has improved over the last several weeks. The promise of public infrastructure spending, corporate and personal tax cuts, increased defense spending, deregulation of the financial system, and lighter regulation of energy producers have all increased builder confidence and investment charts are drastically trending upwards. It remains to be seen how much will be accomplished over the next few months, and what affect that will have on the nonresidential construction segment of the U.S. economy.

While private segments are growing, publicly financed categories continue to decline. Publicly funded construction dropped 0.9 percent to an annual rate of $270.3 billion. Over the past 12 months, government construction has slumped 7.8 percent - a decline equal to nearly $23 billion. Public safety, conservation, sewage and waste disposal categories, have also seen year-over-year spending declines of 6.5% or more. 

In the nonresidential construction sector spending is up by nearly 3% on a year-over-year basis – totaling $699.7 billion. Amid low global interest rates, domestic and global investors in office and lodging have experienced more than 20% spending growth over the past 12 months. Commercial real estate has emerged as one of the favorite destinations for investor capital, helping to raise property values and prompt significant numbers of construction starts.

Housing starts in October also soared 23% at a seasonally adjusted annual rate from September to the highest rate since 2007, the Census Bureau reported on Thursday.

Labor

According to the Bureau of Labor Statistics, the construction industry added 19,000 jobs in November. Meaning, November's total construction employment of 6,704,000 marks the highest level since November 2008. Unemployment remains unchanged from last month’s rate of 5.7%. This is an 8.1% decrease from this time last year.

While this is good news for the industry and those contributing to it, employment growth would be much greater if more skilled or trainable workers were available to fill available job openings. The nonresidential sector added 1,100 net new jobs in November, while the residential sector added 19,600 positions. Heavy and civil engineering lost 2,100 jobs for the month. 

This skills mismatch has caused pay rates to rise an average hourly increase of 0.3% during October 2016. It has risen over each of the past 10 months and grown a total of 2.9% since December 2015. Meaning, the potential to undermine broader economic growth by forcing contractors to slow scheduled work or choose not to bid on projects could inflate the future cost of construction. 

Meanwhile, construction backlog for large contractors remains at a peak of 14.06 months, according to the Associated Builders and Contractors Construction Backlog Indicator. Nationally, the average backlog fell to 8.5 months, down 1.6 percent from the last year. Overall, the Construction Backlog Indicator remained virtually unchanged on a year-over-year basis, signaling that growth in the nation’s non-residential market is slowing.

Commodities & Materials

For the first time in 8 years, OPEC has decided to cut oil production by more than a million barrels a day. We are already seeing ripple effects at some gas pumps. Amid last week’s announcement, the dollar rose sharply against the yen and firmed against the euro.

Oil and the dollar typically move in opposite directions because a stronger dollar makes it more expensive for holders of other currencies to buy oil. But the markets are betting that higher oil prices would increase inflation and drive interest rates upward.

U.S. building materials companies that produce aggregates, ready-mixed concrete, and cement will likely take a small hit from higher oil prices in 2017. Costs associated with transporting materials will increase with rising oil costs, but may be offset by broader economic gains.

According to the U.S. Bureau of Labor Statistics, after rising 0.3% in September, the economy-wide PPI was unchanged last month. Meanwhile, input prices are just 0.5% higher than this time last year. The rise in prices for goods can mainly be attributed to a 2.5% increase in energy prices.

Moving Forward

“The economy will have to deal with a number of headwinds going forward, including a stronger dollar, building inflationary pressures, and higher interest rates. Consumer spending and infrastructure growth will continue to lead the recovery,” said Procore Chief Economist Anirban Basu. As a result, the price of certain inputs—such as iron, steel, copper, plumbing fixtures, and nonferrous wire and cable—will begin to rise more rapidly during the coming months. 

In addition, as our nation attempts to analyze the outlines of a significant infrastructure plan, we need to plan for investments in training and apprentice programs for skilled laborers. This can only drive higher productivity and, ultimately, greater output and reinforce monetary policy. 

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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