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Construction Health Update: Starting Off the New Year with 83


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As of Monday, January 2 our national Construction Health Indicator score is 82.9.

As we begin the New Year, the Construction Health Indicator remains strong with a score of 83. With energy hikes and international trade disputes, the producer price index of several commodities – lumber, copper, ready-mix concrete – weigh heavily on our score. Investments continue to show confidence under the promise of the president-elect’s proposed infrastructure plan. Meanwhile, labor proves to be the most important arena for needed improvement in the industry.

Investments

According to the U.S. Census Bureau, construction spending in October rose by 0.4 percent. 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 indicates that residential construction is seeing a slight decline. A decline is not unreasonable after home construction soared 27 percent to 1.34 million homes in October, the highest level since July 2007.

This is particularly true considering the expectation of tax cuts, regulatory changes and higher budget deficits under President-elect Donald Trump. Because of this, the yield on 10-year U.S. Treasury notes has 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 released last Thursday jumped seven points to 70. The last time the reading was at this level was July 2005, during the high-flying days of the last U.S. housing boom.

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. 

Due to this plan, companies that make construction equipment, engines and aircraft also made large gains as the U.S. economy picked up steam last quarter. Investors bet that the election of Trump, and a Republican Congress that could approve his spending proposals, will lead to more spending on construction, manufacturing, and transportation. 

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. That gain was led by residential builders and trade contractors, reflecting a surge in homebuilding. 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.

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. 

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. 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.

This could translate into further stagnation in construction spending volumes and decreased bottom lines. These conditions will be particularly volatile if interest rates begin to rise more frequently in 2017, encouraging a growing number of proposed projects to become impracticable.

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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