Construction Economic Notes – April, 2013

04/05/2013 by Bernard M. Markstein

Economic overview
The automatic across-the-board cuts for most federal spending, otherwise known as sequestration, went into effect on March 1. A burden for the economy, sequestration’s effects are slowly accumulating and will continue to grow. Some furloughs begin this month (none occurred in March), and several agencies are looking for ways to make necessary cuts while avoiding or limiting furloughs. Some spending reductions were made in the months leading up to March, as many federal agencies and departments, as well as private suppliers, planned for sequestration. Most reliable estimates expect the total effect of sequestration will lower real (inflation-adjusted) gross domestic product (GDP) growth by 0.5%.

The adjustments for sequestration mean some government construction projects will be slowed, delayed or not started—ultimately adding to the cost of projects that do go forward. Meanwhile, the construction industry is likely to be among the first to feel the negative effects of sequestration, with smaller suppliers feeling the most pain. Some suppliers already are seeing a downturn in orders.

The third estimate of fourth quarter 2012 real GDP growth reported an increase of 0.4% at a seasonally adjusted annual rate (SAAR), up from the previous estimate of 0.1%. Although this increase is an improvement over earlier estimates based on less complete data, fourth quarter growth still registered the smallest quarterly increase since first quarter 2011. The slower growth was partially due to plans for sequestration as defense spending was cut. Most notable in the updated GDP data was the revision in investment in nonresidential structures, from an increase of 5.8% (SAAR) to an increase of 16.7%.

Recent problems with Cypress are a reminder that the Eurozone still faces a number of economic issues that have yet to be resolved. Further, these problems can adversely affect financial markets and economies outside the Eurozone.

Politics and the economy
Congress passed, and the president signed into law, a continuing resolution (CR) that keeps the federal government operating through the end of September. However, the CR leaves the sequestration (cutting total spending by $85 billion) in place with only minor modifications. Thus, one problem (funding federal government operations) was solved (sort of), but an unnecessary impediment to the economy (sequestration) was left in place. In terms of budgeting, the CR delays the need for longer-term planning and funding. Thus, if nothing is done before the end of September, the same threats to federal operations and the economy will arise once again.

Prior to September, the federal debt ceiling—another politician-created impediment for the economy—will need to be raised. The current, temporary ceiling expires in mid-May. If the ceiling reverts to its lower level, most federal government operations will grind to a halt. The lower ceiling will also force the U.S. Treasury to delay numerous payments, including payments for Social Security and Medicare, federal payrolls, contractors, tax refunds, and debt payments (a technical default of U.S. government debt).

Nonfarm payroll employment increased by a strong, seasonally adjusted (SA) 236,000 jobs in February, up from a 119,000 increase in January. For the past three months, employment gains have averaged 191,000 jobs per month, a reasonable, though unspectacular amount. That at least is a little higher than the 180,000 jobs per month average in the second half of 2012.

Construction employment increased 48,000 to 5,784,000 jobs—marking the ninth consecutive monthly increase and the highest level of construction employment since September 2009. The not seasonally adjusted (NSA) construction unemployment rate for February was 15.7%, down from 17.1% in February 2012. Reports of spot labor shortages in construction are increasing.

Construction spending
February total commercial construction spending was $885.1 billion (SAAR), +1.2% from January and +6.6% year-to-date (January and February) not seasonally adjusted (NSA), compared to the same period in 2012.

The total construction spending numbers incorporate the following:

Other construction-related economic developments
The February AIA Billings Index rose to 54.9 from 54.2 in January – its highest reading since November 2007. The index has now been above 50 for seven consecutive months. A reading above 50 indicates increased billings—a positive sign for commercial construction.

The February Producer Price Index (PPI) for building materials prices (does not include labor costs) was up 0.3% (SA) after increasing 0.5% in January and was up 2.4% (NSA) from February 2012

An index of prices for inputs to nonresidential construction shot up 1.3% (NSA) in February after rising 0.6% in January. On a year-over-year basis, the index was up 1.7%

Risks to the economy and construction
Major risks to the U.S. economy and, consequently, for commercial construction are: