This is a post from Alex Carrick's blog that covers the Canadian construction industry.

Since 1985, Mr. Carrick has held the position of Canadian Chief Economist with Reed Construction Data's CanaData, the leading supplier of statistics and forecasting information for the Canadian construction industry.

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Construction Industry Forecasts

Notes from Alex Carrick - Feb 29, 2012

Alex Carrick
Two important sources of strength: share prices and non-residential construction

The stock market has been very strong out of the gate early in 2012.

Three of the four major North American indices – Dow Jones Industrials, the S&P 500 and NASDAQ – have just recorded 52-week highs. They range between +25% and +30% versus their 52-week lows which were all recorded in October of last year.

The Toronto Stock Exchange is the laggard, +17 versus its 52-week low, but still 11% below its 52-week high. 

Over a longer time frame, NASDAQ is +116% when compared with its most recent cyclical trough; the S&P 500 is +86%; the Dow Jones Industrials index is +84%; and the TSX, +60%.

For all four indices, February 2009 was the point of greatest weakness in the recession.

It was a major symbolic victory when the Dow Jones recently climbed above 13,000 again.

But it’s not all kudos for the indices.

The pre-recession peak for the three U.S. indices occurred in October 2007. For the TSX, it was in May 2008. The four indices still have a ways to go to make it back to those glory days. 

The shortfall versus the pre-recession high is 7% for the DJI; 12% for the S&P 500; and 13% for the TSX. NASDAQ is actually 4% higher now than it was in October 2007.

A better yardstick for NASDAQ is the February 2000 peak during the boom. NASDAQ’s current level is still 37% short of that lofty perch.

A number of interesting factors are playing a role in elevating equity prices. It’s also worth examining what will be the major influences on share prices moving forward.

Remember the five-asset-classes rule. If you want to know what’s happening in the economy, simply follow the money. It shifts around between stocks, bonds, currencies, commodities and real estate, depending on which is in most favor at any given time.

What are the alternatives to holding stock? Due to the collapse in the U.S. housing market, there is an understandable reluctance to invest in real estate. The latest S&P Case-Shiller home price index fell again in December. The drop in American resale home prices from the peak in the summer of 2006 to the present has been 33.8%.

Consider bonds. With interest rates currently so low, they’re only attractive for their safety value. Hence, there is a flurry to buy bonds when the European debt crisis appears about to bubble over.

When stability reins, the interest in bonds wanes. Despite lingering doubts about whether or not they will be effective enough, a great number of measures have been adopted by the authorities in Europe to alleviate the situation. As a result, the problem has shifted from a boil to a simmer and the flight to U.S. treasuries has abated.

Further on the subject of Europe, the outlook for that region’s economy may not be as bad as many have been imagining. In an example of how a self-correcting mechanism can come in so handy in a free market system, the weakness in the value of the Euro helps the region’s largest and most dynamic country. It has been a spur to German export sales. The unemployment rate in Germany, at 6.8%, is the lowest it’s been in two decades, which was before reunification.

A more serious problem for the world economy may be Japan. The rise in value of the yen – i.e., one flip side of the Euro’s descent – is hurting Japanese export sales. Plus another factor has been added to the mix to slow growth.

The nation’s nuclear power sector remains largely on the sidelines. Only two out of a total of 54 reactors are operational. This is the aftermath of last year’s meltdowns at Fukushima, in the wake of the devastating tsunami damage.

The rest of the nation’s nuclear stations have been undergoing stress tests to determine if they are structurally sound enough. Even if they receive green lights from a technical standpoint, it’s not clear that local authorities – conscious of public sentiment - will allow them to start up again.

Power shortages are the consequence and rationing, plus higher costs of electricity, will hamper Japanese industry. It’s another incentive for firms to locate operations outside the country.

Okay, what about commodities? Clearly, this is an area with a lot of growth potential. The price of oil has already moved back up to $110 U.S. per barrel. The stalemate with Iran over its nuclear weapons program, the question of what to do about the vicious regime in Syria and the prevalence of supply interruptions in Nigeria are hurting the reliability of world oil supplies.

Higher commodity prices are traditionally a boon to the Toronto Stock Exchange. They also generally mean more investment in major raw materials projects. This is important for Canada’s construction industry.

Statistics Canada has just released the results from its annual Private and Public Investment Survey. More will be written on this when the fuller set of data is made available in a week or so.

But for the moment, here are the summary results. Total investment in Canada in 2012 is expected to increase 6.2% versus 2011. It will be comprised of machinery and equipment at +2.1% and construction at +8.0%.

The residential construction increase will be +3.4%. Non-residential construction will be +10.6% in 2012 versus 2011, after a +9.6% gain in 2011. Those are big dollar leaps.

Regionally, the biggest increases in non-residential construction will occur in the resource provinces of Newfoundland and Labrador (+41.3%), British Columbia (+16.9%) and Alberta (+12.2%). While Alberta ranks third in that list, please note that its volume of non-residential construction will be nearly three times B.C.’s level and ten times what Newfoundland will see.

Within industrial sectors, the largest percentage gains are expected to come in transportation and warehousing (+21.5%), mining and oil and gas extraction (+17.7%) and utilities (+14.6%). The transportation and warehousing category includes pipelines as well as encompassing transit and ground transportation industries.

In oil and gas extraction alone, 2012 investment intentions are +14.8% year over year. The non-conventional oil sector (i.e., Alberta’s Fort McMurray region) is expected to account for a 24.6% increase in investment.

A couple of more percentage changes stand out. In the mining sector, investment will be a substantial +25.7%. The capital spending advance in utilities will be 14.6%, with electric power generation and transmission/distribution in B.C. and Alberta providing most of the new push.

Let’s close this article by looking at the broadest influence on the three major U.S. stock market indices. In a further sign of improving business conditions, annualized fourth quarter 2011 growth in gross domestic product (GDP) in the U.S. has been revised upwards to 3.0% from 2.8%.

Even in pockets of the economy where weakness remains, there are some good things to say. For example, the S&P homebuilder sub-index has recorded a sharp rise so far in 2012 on the expectation that activity levels and profits will soon be improving. It’s understandable that investors want to get in on the ground floor.

Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News.


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Read Other Recent Alex Carrick Posts

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