Transcript GLG Presentation Construction in 2007: Will It Be Heaven or

Sorting Out the Outlook for
Construction and Materials
Transportation Estimators Assn., St. Louis
Prepared October 3, 2007
Ken Simonson
Chief Economist
Associated General Contractors of America
[email protected]
Current economic influences
• Moderate real GDP growth (2-3%)
• Low inflation (CPI change 1.5-2.5%)
• Moderate job growth, low unemployment
(avg. 150,000 jobs/mo., 4.6% unem rate)
• Rising real wages, personal income (2%)
• Worries about housing, credit, falling dollar
The shifting construction market
Segment
Total (tril. $, SAAR)
% of total
Private residential
2006
$1.19
8/07
$1.17
54%
45%
New SF
New MF
Improvements
Private nonres.
Public
35
4
14
25
21
26
4
15
30
25
Current housing situation
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Aug. spending: -1.5% vs. Julye, -17% vs. 8/06
Aug. permits: -5.9% vs. July, -24% vs. 8/06
Aug. starts: -2.6% vs. July, -19% vs. 8/06
Aug. new-home sales: -8% vs. July, -21% vs.
8/06
• Aug. jobs: -23,000 vs. July, -155,000 vs. 8/06
• Inventories, time on market remaining high
Single-family (SF) vs. multifamily (MF)
• Aug. construction spending (value put in place):
SF: -3.3% vs. July, -26% vs. 8/06
MF: -0.3% vs. July, -5.3% vs. 8/06
• August housing starts :
SF: -7.1% vs. July, -27% vs. 8/06
MF: +13% vs. July, +14% vs. 8/06
• August building permits :
SF: -8.1% vs. July, -28% vs. 8/06
MF: unchanged vs. July, -15% vs. 8/06
Housing outlook
• SF: No end yet to decline in permits, starts
or spending
• Don’t expect upturn before middle of ‘08
• MF: Rental construction cushioned the fall
in condo starts but now many owners are
trying to rent out houses and condos
• Rate cut helps some buyers/homeowners
but won’t cure credit fraud worries
Nonres ’06 totals, shares, ’07 YTD change
Nonresidential total
$545 billion 100% +14%
Educational
$86 billion
16% +14%
Commercial
$76 billion
14% +15%
Highway & street
$72 billion
13% + 5%
Office
$55 billion
10% +21%
Healthcare
$40 billion
7% +15%
Power
$39 billion
7% +22%
Manufacturing
$34 billion
6% + 6%
Transportation
$27 billion
5% +11%
Sewage & waste disposal $23 billion
4% + 6%
Communication
$21 billion
4% +20%
Amusement & recreation $18 billion
3% + 9%
Lodging
$18 billion
3% +64%
Other 7% (water; public safety; religious; conservation)
Nonresidential segments
(listed in descending order of public +
private spending in 2006)
• Jan-Aug ’07 year-to-date (YTD) share and
growth from Jan-Aug ’06 to Jan-Aug ‘07
• Major influences
• Outlook for ’07 and ’08
Educational
• 16% of public + private nonres. spending YTD;
YTD change Jan-Aug ‘06 to Jan-Aug ‘07: 14%
• Falling primary school enrollment; rising highschool, college, continuing ed
• K-12 affected by property taxes, house values
• Private school/college spending affected by
stock market (through endowment return, gifts)
• 2007 forecast: 9-11% (record bond issues in ‘06;
momentum from 2005-06 revenues; stock gains)
• 2008 forecast: 3-6% (slower revenue growth)
Commercial (retail, warehouse, farm)
• 14% of YTD total; 15% YTD growth
• Led by multi-retail (gen. merchandise, shopping
centers, malls), 16% YTD growth
• Neighborhood retail follows new housing; other
segments affected by home sales or remodeling:
furniture, appliance, yard/garden sales
• 2007: +8-10% (personal income still rising but
less new local, auto-, and housing-related)
• 2008: +4-7% (expanding GDP but tighter credit)
Highway and street
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12% of YTD total; 5% YTD growth
Boosted by 8/05 passage of SAFETEA-LU
CBO projects big deficit starting 10/08
2007: +5-8% (flatter fuel tax receipts, slight
relief on materials costs)
• 2008: 0-5% (depends on receipts, costs)
Office
• 11% of YTD total; +21% YTD growth
• Rebound from weak 2001-05
• Vulnerable to reduced demand from RE
agents, mortgage brokers, title companies
• Tighter credit; large-firm mergers, job cuts
threaten many large-office markets
• 2007: +10-14% (leveling of vacancy rates,
modest job growth)
• 2008: +0-5% (’06 projects end, fewer new)
Power
• 8% of YTD total; +22% YTD growth
• Private electric power has ended 5-year
slump: +22% YTD growth; public +26%
• New plants, transmission lines; retrofits
• Wind, solar growing but from small base
• 2007: +20% (retrofits, new plants,
alternatives)
• 2008: more of the same (+15-25%)
Healthcare (hosp., med. bldg., special care)
• 7% of YTD total; +15% YTD growth
• Led by private hospitals, 16% YTD growth
• Technology, new housing driving hospital
(re)construction; seismic retrofit in CA
• Budget constraints, decline of employerfunded care may slow hospital demand
• 2007: +12-15%
• 2008: +10-15%
Manufacturing
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6% of YTD total; +6% YTD growth
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.)
• 2008: 4-8% (big jobs continue; fewer new)
Transportation facilities
• 5% of YTD total; +11% YTD growth
• Driven by growth in passengers & freight
• Slower economic growth in 2007 implies
less expansion
• 2007: +5-8% (trucking, rail slowdown)
• 2008: +5-8% (more airport, port work)
Lodging
• 5% of YTD total; +64% YTD growth
• Driven by higher room and occupancy
rates; likely to flatten by end of ‘07
• Rebound from 2000-01 recession, post9/11 travel slump
• 2007: +40-60% (more growth in business,
leisure, foreign travelers)
• 2008: -5 to +5% (depends on credit)
Communication
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4% of YTD total; +20% YTD growth
Carriers consolidating but also upgrading
2007: +15-20%
2008: +10-15% (same trends continue)
Sewage & waste disposal
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4% of YTD total; +6% YTD growth
Housing slump means fewer new lines
Major plant and CSO upgrades
2007: +4-6%
2008: +1-5% (continued housing impact)
Amusement & recreation
• 3% of YTD total; +9% YTD growth
• Very diverse: sports venues, playgrounds,
parks, convention centers, theaters
• 2007, 2008: ? (big stadium projects, bond
issues passed in 2006 but flatter public
revenues)
Materials and components
• Higher increases until recently for construction
inputs than for overall economy:
12 mo. to:
12/04 12/05 12/06
8/07
Const PPI
9.1% 8.2% 4.6%
1.6%
CPI-U
3.3% 3.4% 2.5%
2.5%
• Higher cumulative change from 12/03 to 8/07:
Const PPI
28%
CPI-U
13%
• PPI drivers: steel, gypsum, diesel, asphalt,
concrete, copper, plastics, aluminum, wood
Cumulative Change in Consumer, Producer & Construction Prices
(All PPIs = 100 in 12/03)
08/07
130
Percent of 12/03 Level
125
120
115
110
105
100
95
12/03
CPI-U
12/04
12/05
PPI for Finished Goods
12/06
Inputs to Construction Industries
Cumulative Change in PPIs for Construction Types
(All PPIs = 100 in 12/03)
08/07
150
Percent of 12/03 Level
140
130
120
110
100
90
12/03
12/04
12/05
12/06
CPI-U
Highway & Street Construction
Other Heavy Construction
Nonresidential Buildings
Multi-Unit Residential
Cumulative Change in PPIs for Selected Highway Inputs
(All PPIs = 100 in 12/03)
08/07
275
Percent of 12/03 Level
250
225
200
175
150
125
100
75
12/03
CPI-U
12/04
#2 Diesel Fuel
12/05
12/06
Asphalt Paving Mixtures & Blocks
Concrete Products
Cumulative Change in PPIs for Selected Building Inputs
(All PPIs = 100 in 12/03)
08/07
170
Percent of 12/03 Level
160
150
140
130
120
110
100
90
12/03
12/04
12/05
12/06
CPI-U
Plastic Construction Products
Gypsum Products
Lumber & Plywood
Cumulative Change in PPIs for Selected Metal Products
(All PPIs = 100 in 12/03)
08/07
275
Percent of 12/03 Level
250
225
200
175
150
125
100
75
12/03
12/04
12/05
12/06
CPI-U
Steel Mill Products
Copper & Brass Mill Shapes
Aluminum Mill Shapes
Outlook for materials (3-6 months)
• Falling prices: wood, gypsum products;
perhaps plastics
• Likely to rise: diesel, asphalt, copper
• No shortages but longer lead times for
some items
• Year-over-year PPI change: 3-5%
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
Construction labor costs, availability
Average hourly earnings, 8/06-8/07: +4.5%
• Construction employment change: -1.2%
-Residential construction : -4.5%
(residential building & specialty trades)
-Nonresidential construction: +1.5%
(nonres building & specialty trades,
heavy & civil engineering const.)
• Architectural, engineering services: +2.9%
• Nonfarm total: jobs +1.3%, wages +3.9%
Construction labor outlook (12/07 vs. 12/06)
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‘Official’ rise in nonres. employment: 2-4%
‘Official’ decline in res. employment: 4-6%
+ 400-500K ‘res’ specialty trades in nonres
= Actual nonres. employment rise: 11-16%
Actual res. employment loss: 16-20%
Wage increase: 5% (partly due to greater
proportion of nonres., hence higher-paid)
Summary for 2007
• Total const. spending: -6% to -3%
Res: -15% to -20% (huge drop in new SF;
MF and improvements down slightly)
Nonres: +10-15% (led by energy & power,
hospitals, lodging)
• Materials costs: +3-5% Dec.-Dec.
• Labor costs: +4.5-5.5% Dec.-Dec.
Summary for 2008
• Total construction spending: +1-5%
Res: +1-3% (turnaround after mid-2008)
Nonres: +3-7% (led by energy & power,
hospitals; weaker highways, lodging)
• Materials costs: +6-8%
• Labor costs: +5-6%
AGC Economic Resources
(sign up by email to [email protected])
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The Data DIGest: weekly one-page email
PPI tables: emailed monthly
Construction Inflation Alert: Oct. & March
Audioconferences: Dec. & June
State-specific emails (timing varies) and
fact sheets: www.agc.org /factsheets
Ken Simonson
Chief Economist
Associated General Contractors of America
[email protected], 703-837-5313