Construction Economic Notes –  August, 2012

These are the major developments about commercial construction and the U.S. economy for August 2012.

• Second quarter real (inflation-adjusted) gross domestic product (GDP) grew 1.5% at a seasonally adjusted annual rate (SAAR), down from 2.0% growth in the first quarter (revised up from the previously reported 1.9%). This is an advance estimate that will be revised in coming months as more data become available. Although the economy continues to move forward, this is a barely acceptable rate of growth–essentially treading water and creating little incentive for additional investment in nonresidential construction.


• An early indication that the economy’s second quarter growth rate may have represented an unfortunate, but temporary, slowdown is the July employment report. Nonfarm payroll employment increased 163,000 on a seasonally adjusted (SA) basis from June. However, June’s gain was revised down from 80,000 to 64,000. Consistent gains of 100,000+ are necessary to absorb new entrants to the workforce.
• The unemployment rate rose from 8.2% in June to 8.3% in July. Persistent gains of 175,000 and above would put downward pressure on that rate.


• Private employment increased 172,000, its twenty-ninth consecutive monthly increase, while government employment fell 9,000 in July. For a little over two years, gains in private employment have been partially offset by reduced employment at all levels of government.


• Construction employment fell 1,000, its fifth decline over the past six months. Year-to-date total construction employment was down 33,000. Nonresidential construction employment was down 3,800–also its fifth decrease over the past six months–and was down 29,300 year-to-date.


• The July not seasonally adjusted (NSA) unemployment rate for construction workers dropped to 12.3% from 13.6% in July 2011. However, the drop in the rate was not due to increased employment, but from construction workers finding employment elsewhere or leaving the labor force altogether.


• June total commercial construction spending: $842.1 billion (SAAR), +0.4% from May; year-to-date up 9.0% from the same period last year.


• The April and May construction spending numbers were revised up a total of just under $11 billion. As a result, May’s increase was revised up from 0.9% to 1.6%.


• Nonresidential construction spending: $302.1 billion, +0.3% from May; year-to-date up 9.2% from the same period last year. May numbers were revised up $4.9 billion, resulting in a 1.4% increase over April, rather than the 0.1% decline originally reported. Among areas that increased in June were lodging (+3.7%), health care (+0.4%), and manufacturing (+3.7%) construction.


• Heavy engineering construction spending: $267.9 billion, -0.2% from June, which was revised up $2.6 billion; year-to-date up 11.0% from the same period last year. Transportation (+2.6%), communication (+4.3%), and highway (+1.5%) were major spending areas that increased in June.


• New residential construction spending: $153.4 billion, +3.0% from May; year-to-date up 12.8% from the same period last year.


• June’s private construction spending rose $3.7 billion, up 0.7% from May, while public spending was unchanged. May’s public spending was revised up $4.6 billion, enough that spending in May changed from the originally reported 0.4% monthly decline to a 0.5% increase.


• The AIA Billings Index edged up to 45.9 in June from May’s 45.8, but leaves the index below 50, indicating decreased billings.


• The June Producer Price Index (PPI) for building materials prices (does not include labor costs) was unchanged on a seasonally adjusted basis after increasing 0.1% in May and was up 2.2% from June 2011. Meanwhile, an index of prices for inputs to nonresidential construction fell 0.6% (NSA) after the same decrease in May. The index was up only 0.2% from June 2011.

Some Additional Detail on Economic Developments

The Bureau of Economic Analysis (BEA) reported that the U.S. economy slowed in the second quarter with the release of its advance estimate of second quarter real (inflation-adjusted) gross domestic product (GDP) growth of 1.5% at a seasonally adjusted annual rate (SAAR), down from 2.0% growth in the first quarter (revised up from the previously reported 1.9%). The advance estimate will be revised in coming months, as more complete data become available.

Although the economy continues to move forward, this is a barely acceptable rate of growth–essentially treading water and creating minimal incentive for additional hiring or for investment in nonresidential construction. We believe that this is a temporary slowdown, and the next several quarters will see better, though not spectacular, growth.

The BEA also released its annual benchmark revisions of GDP data back to first quarter 2009. The basic story remains the same, although some of the details are slightly different. The decline in 2009 was not quite as bad as originally reported (revised up 0.4%); the rebound not as strong in 2010 (revised down 0.6%); and 2011 was slightly better (revised up 0.1%).

The Bureau of Labor Statistics (BLS) employment report showing July nonfarm payroll employment up 163,000 on a seasonally adjusted (SA) basis provided some support for the view that although economic growth slowed in the second quarter, it is now picking up a bit. While the unemployment rate crept up to 8.3%, that is less worrying as the number comes from a different, smaller, and hence more volatile survey. The only real surprise with the unemployment rate was that it had not risen sooner, given the weak nonfarm payroll employment gains in the second quarter.

Although both residential and nonresidential construction activity have been on an upward trajectory for several months, construction employment keeps declining, though more slowly than a few years ago. It has been nonresidential construction employment that has struggled as it has declined, while employment in residential construction has generally risen over the last 12 months.

Overall, housing continues to improve, but from a low base. Single-family housing starts advanced for the fourth month in a row, up 4.7% in June to 539,000 (SAAR) from May’s 515,000. Single-family building permits rose slightly to 491,000 from May’s 490,000. Both the 20-city and 10-city May S&P/Case-Shiller® Home Price indexes were up–their fourth consecutive monthly increase. Both were still down modestly on a year-over-year basis, 0.7% and 1.0%, respectively.

June new home sales fell 8.4% to 350,000 SAAR, down from May’s 382,000 (revised up from 369,000). Nonetheless, June sales were 15.1% higher than last year. Also, the March through May numbers were revised up a total of 33,000 sales. June’s inventory of new homes for sale at 144,000 remained near the previous month’s record low of 143,000. As a result, any uptick in sales will quickly translate into additional single-family construction activity. Single-family construction spending advanced 3.0% in June after increasing 2.2% in May.

Multifamily housing starts rebounded 12.8% to 221,000 (SAAR) from a 19.3% decrease to 196,000 in May. Given the notorious volatility of the measure, the 3-month moving average provides a better picture of new activity. The average was still down from May, but a slight 0.6% to 220,000. However, it is troubling that June’s 3-month moving average of multifamily building permits of 268,000 was down 4.9% from May–the first decline for the average since February.

Nonetheless, the outlook for multifamily construction looks bright for the near term. The second quarter rental vacancy rate fell to 8.6% (SA) from first quarter’s 8.9% and is the lowest vacancy rate since second quarter 2002. Multifamily construction spending increased 2.8% in June after jumping 5.1% in May. Year-to-date, spending was up 14.8% in June from a year earlier