Construction Economic Notes – May, 2013

05/29/2013 by Bernard M. Markstein

Economic overview
Although the economy has struggled, it continues to move forward. The first estimate of first quarter 2013 real (inflation-adjusted) gross domestic product (GDP) growth was 2.5% at a seasonally adjusted annual rate (SAAR), rebounding from fourth quarter’s slowdown to a crawl at 0.4%. Real GDP has now increased for 15 consecutive quarters. Reductions in federal spending were (and are) a major factor holding down economic growth. For example, first quarter growth would have been in excess of 3%, if federal government spending had been flat rather than reduced by 8.4%.

Politics and the economy
Sequestration, which officially began March 1, is a growing hindrance to the economy. Some (if not most) of the reductions in defense spending in fourth quarter 2012 and first quarter 2013 were undoubtedly made in anticipation of the then upcoming sequestration. Also, it appears many federal agencies and departments slowed or stopped hiring in anticipation of sequestration. In March and April, the number of federal jobs fell by 24,000. Similarly, in the private sector, many government contractors also held off hiring and put off any planned investment, unsure of what sequestration would do to their business prospects.

Now furloughs are being implemented by some government agencies. With the reduction in pay, these workers will reduce spending – a negative for consumer expenditures. There are indications that workers who have received or expect to receive furlough notices are already cutting back their spending in anticipation of their smaller paycheck.

Geographically, the effects of sequestration are being felt disproportionately. The District of Columbia, Maryland, northern Virginia, and areas with a large defense presence are absorbing most of the economic fallout from sequestration.

The politicians in Washington will need to provide funding for government operations prior to the end of September, when the current federal fiscal year ends. Meanwhile, federal debt will reach the current debt ceiling in the fall (most likely in September or October). If the debt ceiling is not raised by then, most federal government operations will grind to a halt.Hitting the 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).

In recent years, the need to fund government operations and to raise the debt ceiling have become points of contention for non-productive political wrangling. The result has been poor outcomes (e.g., continuing, short-term resolutions for funding various parts of the government, preventing long-term planning and preventing elimination or reform of various outdated programs) or bad outcomes (e.g., sequestration).
Real GDP Growth and Contributions to that Growth by Selected Components

Nonfarm payroll employment was up a seasonally adjusted (SA) 165,000 jobs in April, after increasing 138,000 in March (revised up from a rise of 88,000 jobs). The U.S. economy has gained 6.15 million jobs since the most recent low in February 2010, but it is still 2.58 million jobs below its January 2008 peak. Meanwhile, the April SA unemployment rate fell 0.1% to 7.5%, its lowest level since December 2008.

April SA construction employment fell by 6,000 jobs, the first decline following 10 months of increases. The decline in construction jobs was due to a drop in nonresidential construction employment, which was down over 19,000 jobs and only partially offset by increases in residential construction employment. The not seasonally adjusted (NSA) construction unemployment rate was 13.2%, down from 14.5% in April 2012. Reports of spot labor shortages in construction, especially for skilled labor, are increasing.

Construction spending
March total commercial construction spending was $856.7 billion (SAAR), -1.7% from February and +4.7% year-to-date NSA compared to the same period in 2012.

The total construction spending numbers incorporate the following: