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Wednesday, April 27, 2011
"Construction Sloooowly Increases"
The lead paragraph in many national news stories about the country’s economic trends are starting to paint much rosier pictures. But as we continue to read toward the point of the stories’ inverted pyramid, it becomes clear that those three words should appear in the lead.
Raymond James’ almost-giddy April 4-8 Market Commentary is a perfect example:
“Happy days are here again….The job market is now adding jobs at a pace stronger than population growth…. It’s been clear for some time that large-scale job losses are far behind us….Small and medium-size firms have begun to add jobs in recent months….”
The fact is the recession that ended for everyone else nearly two years ago continues to plague the construction industry. Employment rolls remain down; spending for building projects is slow. The construction industry stands at a seasonally adjusted 5,514,000 – about 29 percent lower than it was in April 2006. Just as sad, today’s construction workforce is identical to what it was six months ago. It has been left at the terminal while the rest of the economy takes off on a solid recovery.
The industry’s unemployment rate stands at 20 percent, more than double the overall rate.
“The ongoing drop in construction employment in March, combined with the news that construction spending hit an 11-year low in February, is doubly distressing,” said Ken Simonson, chief economist for the Associated General Contractors of America. “Despite a few signs of an upturn, the industry as a whole has yet to touch bottom five full years after the peak in employment and spending.”
Even the few bright spots for construction, as highlighted in economic reports, come with asterisks. Private commercial construction spending increased 0.9 percent in February, according to a report by the U.S. Census Bureau. That’s welcome news, concedes Anirban Basu, chief economist for the Associated Builders and Contractors. He says the report confirms the beginning of a transition period in the industry from public – especially stimulus package-generated – projects to more private building. But ABC notes the February uptick does little to offset the prolonged downturn. Private nonresidential construction spending is down 13.2 percent in the last 12 months. And total nonresidential construction spending – public and private – is down 6.3 percent for the trailing 12 months. Private building simply is not picking up the slack as federal, state and local government investment in construction dries up.
“As the impact of federal stimulus wanes, and the broader economy continues to recover at a respectable clip, the volume of privately financed construction is now edging higher,” Basu said. “However, for the time being, that slender growth is being more than offset by decreases in publicly financed construction. This pattern is likely to continue into the summer. Demand for privately financed construction will probably expand only gradually due to an excess supply of hotel rooms, office space, retail space and industrial space in many markets. In contrast, the recent decline of construction activity in segments heavily financed by state and local governments will likely continue on that path.”
A combination of intense public construction and policies to stimulate private construction are required to persuade owners hesitant to pull the string on new projects. Here are some suggestions. On the public front:
• Eliminate Davis Bacon on public construction projects thus giving local and state government more bang for their buck in this tight government receipts environment.
• Remove restrictions and limitations on public-private partnerships that would allow construction of optional toll roads and other projects which require little initial outlay of public money.
• Expedite approval processes, environmental impact reviews, licensing, inspections and other red tape to fast track crucial infrastructure projects. While we’re at it, let’s revoke any legislation that requires consideration of project labor agreements.
Getting the private sector building again is the key to a real recovery, however. To jumpstart this vital component to the nation’s good health, we must create private-sector jobs and get money flowing by boosting demand for real estate, manufactured goods, services, travel, etc. Several steps can start us in the right direction:
• Knock down barriers to foreign trade, thereby reducing the cost of imported materials and opening overseas markets to American goods. This will create demand for manufacturing facilities, transportation centers, ports, etc.
• Free up the money supply by not raising taxes, returning retention monies withheld from contractors.
AGC’s “Building a Stronger Future” calls for several of these initiatives, and notes their many benefits: 1. An increase in construction activity will create many new jobs in communities large and small; 2. New construction will increase demand for manufactured goods while boosting global competitiveness. 3. Improved public infrastructure and private buildings will make U.S. businesses more competitive, more efficient and more successful, boosting employment, the economy and overall tax revenue.
The lead paragraph in many national news stories about the country’s economic trends are starting to paint much rosier pictures. But as we continue to read toward the point of the stories’ inverted pyramid, it becomes clear that those three words should appear in the lead.
Raymond James’ almost-giddy April 4-8 Market Commentary is a perfect example:
“Happy days are here again….The job market is now adding jobs at a pace stronger than population growth…. It’s been clear for some time that large-scale job losses are far behind us….Small and medium-size firms have begun to add jobs in recent months….”
The fact is the recession that ended for everyone else nearly two years ago continues to plague the construction industry. Employment rolls remain down; spending for building projects is slow. The construction industry stands at a seasonally adjusted 5,514,000 – about 29 percent lower than it was in April 2006. Just as sad, today’s construction workforce is identical to what it was six months ago. It has been left at the terminal while the rest of the economy takes off on a solid recovery.
The industry’s unemployment rate stands at 20 percent, more than double the overall rate.
“The ongoing drop in construction employment in March, combined with the news that construction spending hit an 11-year low in February, is doubly distressing,” said Ken Simonson, chief economist for the Associated General Contractors of America. “Despite a few signs of an upturn, the industry as a whole has yet to touch bottom five full years after the peak in employment and spending.”
Even the few bright spots for construction, as highlighted in economic reports, come with asterisks. Private commercial construction spending increased 0.9 percent in February, according to a report by the U.S. Census Bureau. That’s welcome news, concedes Anirban Basu, chief economist for the Associated Builders and Contractors. He says the report confirms the beginning of a transition period in the industry from public – especially stimulus package-generated – projects to more private building. But ABC notes the February uptick does little to offset the prolonged downturn. Private nonresidential construction spending is down 13.2 percent in the last 12 months. And total nonresidential construction spending – public and private – is down 6.3 percent for the trailing 12 months. Private building simply is not picking up the slack as federal, state and local government investment in construction dries up.
“As the impact of federal stimulus wanes, and the broader economy continues to recover at a respectable clip, the volume of privately financed construction is now edging higher,” Basu said. “However, for the time being, that slender growth is being more than offset by decreases in publicly financed construction. This pattern is likely to continue into the summer. Demand for privately financed construction will probably expand only gradually due to an excess supply of hotel rooms, office space, retail space and industrial space in many markets. In contrast, the recent decline of construction activity in segments heavily financed by state and local governments will likely continue on that path.”
A combination of intense public construction and policies to stimulate private construction are required to persuade owners hesitant to pull the string on new projects. Here are some suggestions. On the public front:
• Eliminate Davis Bacon on public construction projects thus giving local and state government more bang for their buck in this tight government receipts environment.
• Remove restrictions and limitations on public-private partnerships that would allow construction of optional toll roads and other projects which require little initial outlay of public money.
• Expedite approval processes, environmental impact reviews, licensing, inspections and other red tape to fast track crucial infrastructure projects. While we’re at it, let’s revoke any legislation that requires consideration of project labor agreements.
Getting the private sector building again is the key to a real recovery, however. To jumpstart this vital component to the nation’s good health, we must create private-sector jobs and get money flowing by boosting demand for real estate, manufactured goods, services, travel, etc. Several steps can start us in the right direction:
• Knock down barriers to foreign trade, thereby reducing the cost of imported materials and opening overseas markets to American goods. This will create demand for manufacturing facilities, transportation centers, ports, etc.
• Free up the money supply by not raising taxes, returning retention monies withheld from contractors.
AGC’s “Building a Stronger Future” calls for several of these initiatives, and notes their many benefits: 1. An increase in construction activity will create many new jobs in communities large and small; 2. New construction will increase demand for manufactured goods while boosting global competitiveness. 3. Improved public infrastructure and private buildings will make U.S. businesses more competitive, more efficient and more successful, boosting employment, the economy and overall tax revenue.
Labels: Commercial, Construction Industry, Industrial
Tuesday, April 5, 2011
When Will Commodity Prices Fall?
Contractors, especially those in the retail sector, have for months watched helplessly as building costs have escalated. A glut of resale homes and empty office space and American consumers’ bunker mentality on their purse strings as they wait out the economic siege have left contractors powerless to pass the creeping price increases along to consumers. Meanwhile, their wafer-thin profit margins get shaved even closer.
The culprit is commodity prices. In fact, residential construction costs have fallen significantly from their highs in September 2008, according to National Association of Home Builders Senior Economist Bernard Markstein. That crumb, tossed to builders by the recession as it gluttonously gobbled up job opportunities, sustained contractors throughout the worst of the downturn. Construction costs remain well below those 2008 levels, no thanks to lumber, steel, copper, and most of the other raw materials that go into houses, apartments, schools, and bagel shops. Still, “hard” construction costs represent almost 60 percent of a new home’s sticker price, up from 50 percent less than a decade ago. Markstein noted. Commodities are the blame for more than 100 percent of that increase. In fact, with slackened demand driving land costs lower, competition for a slice of the shrinking pie forcing commissions paid to realtors lower, and bare-bones operating budgets – including marketing – streamlining overhead costs, nearly every other component of a house’s selling price has plunged since 2002.
Profits have not been immune. Markstein says contractors earn less than 9 percent profit on their home sales today, compared with about 12 percent in 2002, as they absorbed the commodity price increases caused by soaring global demand, labor issues and natural and political events that limited supply, conservative development policy, speculation, and more.
The common and easy explanation for the inflationary nation of commodities is that China, Indonesia, India and other developing countries are sucking up the world’s steel and concrete as they modernize their infrastructure and their citizens develop more Western – read consumer-oriented – sensibilities. There is much truth to this analysis. But it only goes so far in explaining how construction commodities, especially those produced in the United States, have seen their prices rise in an environment of stagnated markets.
Investment advisors Goldman Sachs provides another part of the reason – one it identified in a report a year and a half ago in suggesting investors dive into the commodities market:
[T]he commodity problem is, at heart, a supply shortage due to decades of suboptimal investment, which has been exacerbated over the past year by the sharp drop in prices and tight credit conditions. As the commodity markets rebound with the broader global economy we expect a redux of 2008 when severe supply constraints forced the rationing of demand through sharply higher prices to keep the markets balanced.
This would point to price increases being temporary, as basic economic principle takes hold and quantity is regulated upward as dictated by the availability of excess profits. When mines, mills, factories, and farms believe demand for their products is sustainable, Markstein writes, they will reopen shuttered plants and increase their production capacities; prices will return to normal. Currently that confidence does not exist.
On the other hand, a recent Economist story points out disturbing evidence that the current commodity price cycle could last well into the next decade. The premise is that “the current surge in commodity prices, at a time of spare economic capacity in the rich world, suggests [e]ither the needs of the developing world are causing demand growth to outstrip supply for an extended period, or new sources of supply can be found only at higher cost. Both explanations add weight to the idea of a “commodity supercycle”, a long-term surge in prices that might last for 15-20 years.”
Still another reason for the confounding commodity inflation is Wall Street’s willingness to take Goldman Sach’s advice and play the market. The Federal Reserve Bank gave this investment strategy a boost late last year with its quantitative easement policy announced late last year. That effectively drove investors out of the bond market. Seeking alternatives, many planted their money in commodities. Increased demand = higher prices.
Anirban Basu, chief economist for the Associated Builders and Contractors, reports that all these causes are putting additional continuous pressure on contractors in their efforts to ride out the economic storm. “With the cost of construction rising in many instances, developers and others may choose to further delay construction starts. This, of course, represents bad news for an industry already associated with an unemployment rate above 20 percent and spending volumes that are nearly 25 percent below late-2008 levels. The hope is that speculators will not continue to pour money into commodities and that material prices will be better behaved in the months ahead,” Basu said.
Whether the current surge in commodity prices is temporary, caused by low production capacity or the beginning of a long-term “supercycle,” contractors who can adapt will be in positions of competitive advantage by finding viable material alternatives and using scarce resources more efficiently.
Contractors, especially those in the retail sector, have for months watched helplessly as building costs have escalated. A glut of resale homes and empty office space and American consumers’ bunker mentality on their purse strings as they wait out the economic siege have left contractors powerless to pass the creeping price increases along to consumers. Meanwhile, their wafer-thin profit margins get shaved even closer.
The culprit is commodity prices. In fact, residential construction costs have fallen significantly from their highs in September 2008, according to National Association of Home Builders Senior Economist Bernard Markstein. That crumb, tossed to builders by the recession as it gluttonously gobbled up job opportunities, sustained contractors throughout the worst of the downturn. Construction costs remain well below those 2008 levels, no thanks to lumber, steel, copper, and most of the other raw materials that go into houses, apartments, schools, and bagel shops. Still, “hard” construction costs represent almost 60 percent of a new home’s sticker price, up from 50 percent less than a decade ago. Markstein noted. Commodities are the blame for more than 100 percent of that increase. In fact, with slackened demand driving land costs lower, competition for a slice of the shrinking pie forcing commissions paid to realtors lower, and bare-bones operating budgets – including marketing – streamlining overhead costs, nearly every other component of a house’s selling price has plunged since 2002.
Profits have not been immune. Markstein says contractors earn less than 9 percent profit on their home sales today, compared with about 12 percent in 2002, as they absorbed the commodity price increases caused by soaring global demand, labor issues and natural and political events that limited supply, conservative development policy, speculation, and more.
The common and easy explanation for the inflationary nation of commodities is that China, Indonesia, India and other developing countries are sucking up the world’s steel and concrete as they modernize their infrastructure and their citizens develop more Western – read consumer-oriented – sensibilities. There is much truth to this analysis. But it only goes so far in explaining how construction commodities, especially those produced in the United States, have seen their prices rise in an environment of stagnated markets.
Investment advisors Goldman Sachs provides another part of the reason – one it identified in a report a year and a half ago in suggesting investors dive into the commodities market:
[T]he commodity problem is, at heart, a supply shortage due to decades of suboptimal investment, which has been exacerbated over the past year by the sharp drop in prices and tight credit conditions. As the commodity markets rebound with the broader global economy we expect a redux of 2008 when severe supply constraints forced the rationing of demand through sharply higher prices to keep the markets balanced.
This would point to price increases being temporary, as basic economic principle takes hold and quantity is regulated upward as dictated by the availability of excess profits. When mines, mills, factories, and farms believe demand for their products is sustainable, Markstein writes, they will reopen shuttered plants and increase their production capacities; prices will return to normal. Currently that confidence does not exist.
On the other hand, a recent Economist story points out disturbing evidence that the current commodity price cycle could last well into the next decade. The premise is that “the current surge in commodity prices, at a time of spare economic capacity in the rich world, suggests [e]ither the needs of the developing world are causing demand growth to outstrip supply for an extended period, or new sources of supply can be found only at higher cost. Both explanations add weight to the idea of a “commodity supercycle”, a long-term surge in prices that might last for 15-20 years.”
Still another reason for the confounding commodity inflation is Wall Street’s willingness to take Goldman Sach’s advice and play the market. The Federal Reserve Bank gave this investment strategy a boost late last year with its quantitative easement policy announced late last year. That effectively drove investors out of the bond market. Seeking alternatives, many planted their money in commodities. Increased demand = higher prices.
Anirban Basu, chief economist for the Associated Builders and Contractors, reports that all these causes are putting additional continuous pressure on contractors in their efforts to ride out the economic storm. “With the cost of construction rising in many instances, developers and others may choose to further delay construction starts. This, of course, represents bad news for an industry already associated with an unemployment rate above 20 percent and spending volumes that are nearly 25 percent below late-2008 levels. The hope is that speculators will not continue to pour money into commodities and that material prices will be better behaved in the months ahead,” Basu said.
Whether the current surge in commodity prices is temporary, caused by low production capacity or the beginning of a long-term “supercycle,” contractors who can adapt will be in positions of competitive advantage by finding viable material alternatives and using scarce resources more efficiently.
Labels: Commercial, Construction Industry, Industrial