Sorting Out the Outlook for Construction and Materials

1
Sorting Out the Outlook for Construction and
Materials

• AGC Chapter National Leaders
• Washington, May 1, 2007
• Ken Simonson
• Chief Economist
• Associated General Contractors of America
• simonsonk_at_agc.org

2
Current economic influences

• Slow real GDP growth (1.3-2.5)
• Low inflation (CPI change 1-3)
• Moderate job growth, low unemployment (avg.
  150,000 jobs/mo., 4.4 unem rate)
• Rising real wages, personal income (2)
• Worries about housing, falling dollar

3
The shifting construction market

• Segment 2006 3/07
• Total (tril. , SAAR) 1.20 1.19
• of total
• Private residential 53 48
• New SF 35 28
• New MF 3 5
• Improvements 13 15
• Private nonres. 24 28
• Public 22 24

4
Current housing situation

• Mar. jobs 9,800 vs. Feb., -125,000 vs. 3/06
• March permits 0.8 vs. Feb., -26 vs. 3/06
• March starts 0.8 vs. Feb., -23 vs. 3/06
• March new-home sales 2.6 vs. Feb., -23 vs.
  3/06
• Inventories, time on market increasing

5
Single-family (SF) vs. multifamily (MF)

• Mar. construction spending (value put in place)
• SF 0.1 vs. Feb., but -27 vs. 3/06
• MF 0.2 vs. Feb., 1.5 vs. 3/06
• March housing starts
• SF 2 vs. Feb., -25 vs. 3/06
• MF -4 vs. Feb., -16 vs. 3/06
• March building permits
• SF 1 vs. Feb., -28 vs. 3/06
• MF -0.7 vs. Feb., -19 vs. 3/06

6
Housing outlook

• SF No end yet to decline in permits, starts or
  spending
• Dont expect upturn before 2nd Q of 08
• MF Condo sales, starts, permits similar to SF
  but rentals help spending
• Rentals to keep MF spending near 06 level if not
  too many vacancies

7
Educational

• 15 of public priv. nonres spending in 2006
  change from Q1 06 to Q1 07 9
• Falling primary school enrollment rising
  high-school, college, continuing ed
• K-12 spending affected by property taxes, thus by
  house values
• Private school/college spending affected by stock
  market (through endowment return, gifts)
• 2007 forecast 6-8 (record bond issues in 06
  momentum from 2005-06 revenues stock gains)

8
Commercial (retail, warehouse, farm)

• 15 of 06 nonres total 9 Q1 07 vs. Q1 06
• Biggest growth is in multi-retail (gen. mdse.,
  shopping centers, malls) 19 Q1 '07 vs. Q1 '06
• Neighborhood retail follows new housing other
  segments affected by home sales or remodeling
  furniture, appliance, yard/garden sales
• 2007 2-5 (personal income still rising but
  less new local, auto-, and housing-related)

9
Highway and street

• 14 of 06 total 13 Q1 '07 vs. Q1 '06
• Boosted by 8/05 passage of federal hwy spending
  reauthorization housing boom
• But 1/2 of gain was material costs
• Toll roads a growing share of total
• 2007 6-9 (flatter fuel tax receipts, slight
  relief on materials costs)
• 2008 0-10 (depends on receipts, costs)

10
Office

• 10 of 06 total 26 Q1 '07 vs. Q1 '06
• Rebound from weak 2001-05
• Vulnerable to reduced demand from RE agents,
  mortgage brokers, title companies
• Large-firm mergers, job cuts threaten selected
  large-office markets
• 2007 5-8 (leveling of vacancy rates, modest
  job growth)

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Healthcare (hosp., med. bldg., special care)

• 7 of 06 total 17 Q1 '07 vs. Q1 '06
• Led by private hospitals, 22 Q1 '07 vs. Q1 '06
• Technology, new housing driving hospital
  (re)construction seismic retrofit in CA
• Budget constraints, decline of employer-funded
  care may slow hospital demand
• 2007 10-12

12
Power

• 7 of 06 total 2 Q1 '07 vs. Q1 '06
• Private electric power has ended 5-year slump
  15 Q1 '07 vs. Q1 '06
• gt100 plants being designed, planned transmission
  also likely to grow
• Wind, solar growing but from small base
• 2007 15-20 (retrofits, new plants,
  alternatives)

13
Manufacturing

• 7 of 06 total 16 Q1 '07 vs. Q1 '06
• Catching up from 1998-2004 slump
• Strong shipments, high capacity utilization
• Long lead times on refineries, mining, cement
  plants aircraft, heavy equipment
• 2007 5-10 (less automotive, pharma more
  export-oriented plants, foreign inv.)

14
Transportation facilities

• 5 of 06 total 11 Q1 '07 vs. Q1 '06
• Driven by growth in passengers freight
• Slower economic growth in 2007 implies less
  expansion
• 2007 4-6

15
Amusement recreation

• 4 of 06 total 8 Q1 '07 vs. Q1 '06
• Very diverse sports venues, playgrounds, parks
  up in Q1 '07 conven. centers down
• 2007 ? (big stadium projects, bond issues passed
  in 2006 but flatter public revenues)

16
Lodging

• 4 of 06 total 63 Q1 '07 vs. Q1 '06
• Driven by higher room and occupancy rates
• Rebound from 2000-01 recession, post-9/11 travel
  slump
• 2007 15 (more growth in business, leisure,
  foreign travelers)

17
Sewage and waste disposal

• 3 of total 6 Q1 '07 vs. Q1 '06
• Driven in part by homebuilding boom, state/local
  revenue growth
• Both of these factors have turned negative
• 2007 -2 to 2

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Materials and components

• Persistently higher increases for const.
  materials than for overall economy
• 12 mo. to 12/04 12/05 12/06 3/07
• Const PPI 10.1 6.1 4.3 3.0
• CPI-U 3.3 3.4 2.5 2.8
• PPI drivers steel, gypsum, diesel, asphalt,
  concrete, copper, plastics, aluminum

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Changes in Consumer, Producer Construction
Prices (12-Month Change through Month Shown)
03/07
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Changes in PPIs for Selected Highway
Inputs (12-Month Change through Month Shown)
03/07
21
Changes in PPIs for Selected Building
Inputs (12-Month Change through Month Shown)
03/07
22
Changes in PPIs for Selected Metal
Products (12-Month Change through Month Shown)
03/07
23
Changes in PPIs for Construction Types (12-Month
Change through Month Shown)
03/07
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Outlook for materials (3-6 months)

• Falling prices wood, gypsum products perhaps
  plastics
• Recent increases that may continue steel,
  diesel, asphalt, concrete, aluminum
• No shortages (except possibly stainless steel
  asphalt in some markets)
• Year-over-year PPI change 4-6

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Outlook for materials (1-5 years)

• Growth in construction activity same growth in
  demand for materials
• Materials are in worldwide demand, 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

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Construction labor costs, availability

• Average hourly wages, 3/06-3/07 5.2
• Construction employment change 0.3
• -Residential construction -3.6
• (resid. building specialty trades)
• -Nonresidential construction 3.9
• (nonres. building specialty trades, heavy
  civil engineering const.)
• Architectural, engineering services 4.2

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Construction labor outlook

• Further decline in res. employment 3-5
• Some transferability to nonres. (cement, elec.,
  plumbing, wallboard, not carpentry)
• Further rise in nonres. employment 3-5
• Wage increase 5 (partly due to greater
  proportion of nonres, hence higher-paid)

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Summary for 2007

• Total const. spending -2 to 2
• Res -8 to -12 (drop in new SF MF
• and improvements close to flat)
• Nonres 8-12 (led by energy
  power, hospitals, lodging)
• Materials costs 6-8 Dec.-Dec.
• Labor costs 5 Dec.-Dec.

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AGC Economic Resources

• The Data DIGest weekly one-page email
• PPI tables emailed monthly
• Construction Inflation Alert twice yearly
• Podcasts www.agc.org/podcast
• Audio conference Thursday, June 7, 2 pm

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• Ken Simonson
• Chief Economist
• Associated General Contractors of America
• simonsonk_at_agc.org, 703-837-5313