Construction Economic Notes – September, 2012

09/14/2012 by Bernard M. Markstein

Executive Summary

Major developments for commercial construction and the U.S. economy include the following:

Some Additional Detail on Economic Developments

The Bureau of Economic Analysis (BEA) reported that the U.S. economy grew 1.7% at a seasonally adjusted annual rate (SAAR) in the second quarter, revised up from 1.5% growth, based on its second estimate of real (inflation-adjusted) gross domestic product (GDP) growth. This still left second quarter growth down from the first quarter’s 2.0% increase.

The employment report for August proved disappointing with nonfarm payroll employment increasing only 96,000. The average increase for the last three months is a similarly low 94,000. Although rising employment is better than falling employment, this rate of increase is much too slow to do much more than barely absorb new entrants into the workforce without reducing the pool of people already unemployed. Thus, the initially surprising report that the unemployment rate fell from 8.3% in July to 8.1% in August turned out to be due to discouraged job seekers leaving the workforce.

Construction spending fell in July. All three major groups—nonresidential building, heavy engineering, and total residential—were down. As always, care must be taken not to read too much into one month’s numbers, especially given that the data are often revised. Even so, it is troubling that June’s numbers were revised down rather than up. Nonetheless, all three groups were up on a year-to-date basis over the same period last year. The large majority of the main categories that make up these groups are also up year-to-date. Heavy engineering had the most difficulty given cutbacks in government funding for infrastructure projects at the federal, state, and local levels.

One positive is new residential construction. Both new single-family and multifamily construction spending have generally been increasing for over a year. On a year-to-date basis, they were up 13.5% (single-family) and 15.8% (multifamily) in July over the same period in 2011. Total residential spending fell in July due to the improvements category, which is among the least accurate data included in the construction spending numbers and is frequently subject to large revisions. For example, in the most recent (August) release, improvements were revised up $1.2 billion for May, 1.0% higher than the number reported in the July release, and $3.9 billion for June, up 3.2% from the July release number.

Overall, housing continues to improve, although single-family housing starts fell 6.5% in July to 502,000 (SAAR) from June’s 537,000. Despite the July reversal, the first decline in five months, single-family starts have been at or above 460,000 for the past nine months and above 500,000 for six of the last eight months. Indicating a return to improvement in coming months, July single-family building permits jumped 4.1% to 511,000, their highest level since March 2010.

Another, perhaps even more important reading, was that both 10-city and 20-city S&P/Case-Shiller® Home Price indexes increased for the fifth month in a row—up 1.0% and 0.9%, respectively, in June on a seasonally adjusted (SA) basis. Further, the indexes were up 0.1% and 0.5%, respectively, on a year-over-year basis. Meanwhile, the quarterly national index rose 2.2% (SA) in the second quarter after also rising in the first quarter. The index was up 1.2% from the second quarter 2011. The increase in home prices should bolster potential buyers’ confidence in the decision to purchase a home and lenders’ willingness to provide loans to both buyers and builders.

July new single-family home sales increased 3.6% to 372,000 (SAAR). That was up from June’s 359,000, which was revised up from 350,000. Also, on a year-over-year basis, July sales stood 25.9% higher than in 2011. Meanwhile, the inventory of new homes for sale for July fell to a record low 142,000. As a result, any uptick in sales will quickly translate into additional single-family construction activity.

July multifamily starts surged 12.4% for the second month in a row to 244,000 (SAAR). More instructive given multifamily starts’ volatility, July’s three-month moving average inched up 0.2% to 218,000 from June. The moving average has now been above 200,000 starts for nine straight months. Meanwhile, July’s three-month moving average of multifamily building permits was 287,000, its highest reading since September 2008.

Major risks to the U.S. economy and, consequently for commercial construction, continue to be (in order of concern):

  1. Problems in the Euro Zone, with the focus on the risk of sovereign debt default by one or more major European countries
  2. No action on the approaching fiscal cliff (expiration of the Bush tax cuts at the end of this year)
  3. Also, no action on the federal debt ceiling, and with the debt will approaching the ceiling In early 2013, threatens to force cessation of many government functions
  4. The possibility of sustained, significantly higher oil prices (roughly $150 a barrel or higher).