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Will Construction Abate or Be Great in 2008?

Explore Ken Simonson's analysis on the shifting construction market, housing situation, and nonresidential spending outlook for 2008 based on economic influences and current trends.

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Will Construction Abate or Be Great in 2008?

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  1. Will Construction Abate orBe Great in 2008? Prepared February 4, 2008 Ken Simonson, Chief Economist Associated General Contractors of America simonsonk@agc.org

  2. Current economic influences • Moderate real GDP growth (2% or so) • Moderate inflation (CPI change 2.5-3.5%) • Slim job growth, moderate unemployment (avg. 100,000 jobs/mo., 5% unem rate) • Rising real wages, personal income (~1%) • Worries about housing, credit, falling dollar Source: Author, from BEA (GDP, personal income), BLS (CPI, employment, unemployment)

  3. The shifting construction market Segment12/0612/07 Total (trillion $, SAAR) $1.17 $1.14 % of total Private residential 50% 41% New SF 30 22 New MF 5 4 Improvements 15 15 Private nonres. 27 33 Public 23 26 Source: Author, from Census (construction spending)

  4. Current housing situation • Jan. jobs: -28,000 vs. Dec., -244,000 vs. 1/07 • Dec. permits: -8.1% vs. Nov., -34% vs. 12/06 • Dec. starts: -14% vs. Nov., -38% vs. 12/06 • Dec. spending: -2.8% vs. Nov., -20% vs. 12/06 • Dec. new-home sales: -4.7% vs. Nov., -41% vs. 12/06 • Inventories, time on market remaining high Source: Census (construction spending, permits, starts, sales), BLS (jobs)

  5. Single-family (SF) vs. multifamily (MF) • Dec. construction spending (value put in place): SF: -5.4% vs. Nov., -31% vs. 12/06 MF: -1.9% vs. Nov., -16% vs. 12/06 • Dec. housing starts : SF: -2.9% vs. Nov., -36% vs. 12/06 MF: -40% vs. Nov., -45% vs. 12/06 • Dec. building permits : SF: -10% vs. Nov., -41% vs. 12/06 MF: -4.1% vs. Nov., -16% vs. 12/06 Source: Census

  6. Housing outlook • SF: No end yet to decline in permits, starts or spending • Starts won’t improve until late ’08 at best • MF: Rental construction cushioned the fall in condo starts but now many owners are trying to rent out houses and condos • Foreclosures will add to inventories, drag down both sales and rentals

  7. Nonres ’07 totals, shares, change from ‘06 Nonresidential total$630 billion100% +16% Educational $98 billion 16% +14% Commercial $85 billion 14% +13% Highway & street $77 billion 12% + 7% Office $65 billion 10% +20% Power $50 billion 8% +27% Healthcare $45 billion 7% +14% Manufacturing $38 billion 6% + 9% Transportation $31 billion 5% +16% Lodging $30 billion 5% +66% Communication $26 billion 4% +21% Sewage & waste disposal $25 billion 4% + 7% Other 9% (amusement; water; safety; relig.; conservation) Source: Census

  8. Nonresidential segments (listed in descending order of public + private spending in 2007) • 2007 share and growth from 2006 to 2007 • Major influences • Outlook for 2008 Source: Census

  9. Educational • 16% of 2007 public + private nonres. spending; grew 14% from 2006 • Falling primary school enrollment; rising high-school, college, continuing ed • K-12 affected by property taxes, house values • Private school/college spending affected by stock market (through endowment return, gifts) • 2008 forecast: 3-6% (slower property tax revenue growth, strong college-level const.) Source: Census; author’s forecasts

  10. Commercial (retail, warehouse, farm) • 14% of ‘07 total; grew 13% from ‘06 • Led by multi-retail (gen. merchandise, shopping centers, malls), grew 15% in ‘07 • Neighborhood retail follows new housing; other segments affected by home sales or remodeling: furniture, appliance, yard/garden sales • 2008: +1-4% (expanding GDP but tighter credit) Source: Census; author’s forecasts

  11. Highway and street • 12% of ‘07 total; grew 7% from ’06 • Federal, state trust funds are running low • CBO projects $1.3 bil. deficit starting 10/08 • 2008: 3-7% (one-time boost from feds but trouble in 2009) • Costs up for diesel, steel, maybe asphalt Source: Census; author’s forecasts

  12. Office • 10% of ‘07 total; grew 20% from ‘06 • Job growth has slowed, vacancies are up • Vulnerable to reduced demand from RE agents, mortgage brokers, title companies • Tighter credit; large-firm mergers, job cuts threaten many large-office markets • 2008: +0-5% (’07 projects end, fewer new) Source: Census; author’s forecasts

  13. Power • 8% of ‘07 total; grew 27% from ‘06 • New plants, transmission lines; retrofits • Wind, solar growing but from small base • 2008: more of the same (+15-25%) Source: Census; author’s forecasts

  14. Healthcare (hosp., med. bldg., special care) • 7% of ‘07 total; grew 14% from ’06 • Hospitals are 2/3 of the total • Technology, new housing driving hospital (re)construction; seismic retrofit in CA • Medical building demand could slow if more generic offices become available • 2008: +10-15% Source: Census; author’s forecasts

  15. Manufacturing • 6% of ‘07 total; grew 9% from '06 • Catch-up from 1998-2004 slump is over • Shipments, capacity utilization are flat • Diverse projects: refineries, biodiesel, cement plants; some autos, steel, gypsum • 2008: 2-5% (big jobs continue; more foreign investment; fewer new starts) Source: Census; author’s forecasts

  16. Transportation facilities • 5% of '07 total; grew 16% from '06 • Driven by growth in passengers & freight • Public (airports, transit, water) grew 18% • Trucking, airlines are cutting, rail is mixed • 2008: +5-10% (more airport, port work but continuing weakness in trucking, rail) Source: Census; author’s forecasts

  17. Lodging • 5% of '07 total; grew 66% from '06 • Driven by higher room and occupancy rates; likely to fall if GDP stalls • Ongoing work in Las Vegas, NYC; fewer “generic” hotels • 2008: -5 to +5% (depends on credit, number of foreign visitors) Source: Census; author’s forecasts

  18. Communication • 4% of '07 total; grew 21% from '06 • New round of cell towers, server farms • 2008: +10-15% (same trends continue but could slow abruptly) Source: Census; author’s forecasts

  19. Sewage & waste disposal • 4% of '07 total; grew 7% from '06 • Housing slump means fewer new lines • Major plant and CSO upgrades • 2008: +1-5% (continued impact of homebuilding slump, tighter finances) Source: Census; author’s forecasts

  20. Materials and components • Higher increases for construction inputs than for overall economy: 12 mo. to: 12/0412/0512/0612/07 Const PPI 9.1% 8.2% 4.6% 4.5% CPI-U 3.3% 3.4% 2.5% 4.1% • Cumulative change double the CPI since 12/03: Const PPI 29% CPI-U 14% • PPI drivers: steel, gypsum, diesel, asphalt, concrete, copper, plastics, aluminum, wood Source: BLS (CPI, PPI)

  21. Cumulative Change in Consumer, Producer & Construction Prices (All PPIs = 100 in 12/03)

  22. Cumulative Change in PPIs for Construction Types (All PPIs = 100 in 12/03)

  23. Cumulative Change in PPIs for Selected Highway Inputs (All PPIs = 100 in 12/03)

  24. Cumulative Change in PPIs for Selected Building Inputs (All PPIs = 100 in 12/03)

  25. Cumulative Change in PPIs for Selected Metal Products (All PPIs = 100 in 12/03)

  26. Outlook for materials • Falling prices: wood, gypsum products • Likely to rise: diesel, steel; maybe asphalt, copper • No shortages but longer lead times for some items • Year-over-year PPI change: 6-8%; highest for highway/heavy; less for buildings Source: Author’s forecasts

  27. Outlook for materials (1-5 years) • Construction remains dependent on specific materials • Same materials in demand worldwide, with uncertain supply growth (e.g., copper, oil) • Construction requires physical delivery • Thus, industry is subject to price spurts, transport bottlenecks, fuel price swings • Expect 6-8% PPI increases, higher spikes Source: Author’s forecast

  28. Construction labor costs, availability Change in average hourly earnings, 1/07-1/08: construction 3.6%; nonfarm private sector 3.7% • Employment change: const -3.6%; total +0.7% -Residential construction : -7.3% (residential building & specialty trades) -Nonresidential construction: -0.8% (nonres building & specialty trades, heavy & civil engineering const.) • Architectural, engineering services: +3.9% Source: Author’s calculations from BLS

  29. Actual nonres employment is growing • Res. job loss should = drop in spending: -20% (additional 400,000 jobs), not -7% • Error is in ‘residential’ specialty trades that are now doing nonres work • If 400,000 ‘res’ spec trades are in nonres, then nonres change = +8% (not -0.8%), in line with 16% rise in nonres spending • 8% job gain implies 5-6% wage rise in ‘08 Source: Author’s calculations from BLS

  30. Summary for 2008 • Total construction spending: -6 to -2% Res: -20 to -15% (turnaround in late 2008) Nonres: +4-8% (led by energy, power, communications, hospitals, higher ed; weaker retail, office, lodging) • Materials costs: +6-8% • Labor costs: +5-6% Source: Author’s forecasts

  31. AGC Economic Resources (sign up by email to simonsonk@agc.org) • The Data DIGest: weekly one-page email • Audioconferences: twice yearly • PPI tables: emailed monthly • Construction Inflation Alert: Oct. & March • State-specific emails (timing varies) and fact sheets: www.agc.org /factsheets

  32. Ken Simonson Chief Economist Associated General Contractors of America simonsonk@agc.org, 703-837-5313

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