Sorting Out the Outlook for Construction and Materials

1
Sorting Out the Outlook for Construction and
Materials

• Prepared September 5, 2007
• Ken Simonson
• Chief Economist
• Associated General Contractors of America
• simonsonk_at_agc.org

2
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

3
The shifting construction market

• Segment 2006 7/07
• Total (tril. , SAAR) 1.19 1.17
• of total
• Private residential 54 46
• New SF 35 26
• New MF 4 4
• Improvements 14 15
• Private nonres. 25 30
• Public 21 25

4
Current housing situation

• July spending -1.4 vs. June, -16 vs. 7/06
• July permits -2.8 vs. June, -23 vs. 7/06
• July starts -6.1 vs. June, -21 vs. 7/06
• July new-home sales 2.8 vs. June, -10 vs.
  7/06
• July jobs no change vs. June, -117,000 vs. 7/06
• Inventories, time on market remaining high

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

• July construction spending (value put in place)
• SF -2.2 vs. June, -25 vs. 7/06
• MF -1.1 vs. June, -3.8 vs. 7/06
• July housing starts
• SF -7.3 vs. June, -25 vs. 7/06
• MF 1.6 vs. June, -0.3 vs. 7/06
• July building permits
• SF -1.6 vs. June, -24 vs. 7/06
• MF -6.1 vs. June, -19 vs. 7/06

6
Housing outlook

• SF No end yet to decline in permits, starts or
  spending
• Dont 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

7
Nonres 06 totals, shares, 07 YTD change

• Nonresidential total 545 billion
  100 14
• Educational 86 billion 16 13
• Commercial 76 billion 14 15
• Highway street 72 billion 13 5
• Office 55 billion 10 22
• Healthcare 40 billion 7 16
• Power 39 billion 7 21
• Manufacturing 34 billion 6 8
• Transportation 27 billion 5 10
• Sewage waste disposal 23 billion 4 6
• Communication 21 billion 4 21
• Amusement recreation 18 billion 3 10
• Lodging 18 billion 3 64
• Other 7 (water public safety religious
  conservation)

8
Nonresidential segments

• (listed in descending order of public
• private spending in 2006)
• Jan-July 07 year-to-date (YTD) share and growth
  from Jan-July 06 to Jan-July 07
• Major influences
• Outlook for 07 and 08

9
Educational

• 16 of public private nonres. spending YTD YTD
  change Jan-July 06 to Jan-July 07 13
• 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)
• 2007 forecast 9-11 (record bond issues in 06
  momentum from 2005-06 revenues stock gains)
• 2008 forecast 3-6 (slower revenue growth)

10
Commercial (retail, warehouse, farm)

• 14 of YTD total 15 YTD growth
• Led by multi-retail (gen. merchandise, shopping
  centers, malls), 18 YTD growth
• Neighborhood retail follows new housing other
  segments affected by home sales or remodeling
  furniture, appliance, yard/garden sales
• 2007 6-8 (personal income still rising but
  less new local, auto-, and housing-related)
• 2008 4-7 (expanding GDP but tighter credit)

11
Highway and street

• 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)

12
Office

• 11 of YTD total 22 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 selected large-office markets
• 2007 8-12 (leveling of vacancy rates, modest
  job growth)
• 2008 3-7 (06 projects end, fewer new)

13
Power

• 8 of YTD total 21 YTD growth
• Private electric power has ended 5-year slump
  18 YTD growth public 30
• New plants, transmission lines retrofits
• Wind, solar growing but from small base
• 2007 15-20 (retrofits, new plants,
  alternatives)
• 2008 more of the same

14
Healthcare (hosp., med. bldg., special care)

• 7 of YTD total 16 YTD growth
• Led by private hospitals, 18 YTD growth
• Technology, new housing driving hospital
  (re)construction seismic retrofit in CA
• Budget constraints, decline of employer-funded
  care may slow hospital demand
• 2007 12-15
• 2008 10-15

15
Manufacturing

• 6 of YTD total 8 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)

16
Transportation facilities

• 5 of YTD total 10 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)

17
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, post-9/11 travel
  slump
• 2007 30-50 (more growth in business, leisure,
  foreign travelers)
• 2008 -5 to 5 (depends on credit)

18
Communication

• 4 of YTD total 21 YTD growth
• Carriers consolidating but also upgrading
• 2007 15-20
• 2008 10-15 (same trends continue)

19
Sewage waste disposal

• 4 of YTD total 7 YTD growth
• Housing slump means fewer new lines
• Major plant and CSO upgrades
• 2007 4-6
• 2008 1-5 (continued housing impact)

20
Amusement recreation

• 3 of YTD total 10 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)

21
Materials and components

• Persistently higher increases for construction
  inputs than for overall economy
• 12 mo. to 12/04 12/05 12/06 7/07
• Const PPI 9.1 8.2 4.6 2.8
• CPI-U 3.3 3.4 2.5 2.4
• Cumulative from 12/03 to 7/07
• Const PPI 29
• CPI-U 13
• PPI drivers steel, gypsum, diesel, asphalt,
  concrete, copper, plastics, aluminum

22
Cumulative Change in Consumer Construction
Prices (All PPIs 100 in 12/03)
23
Cumulative Change in PPIs for Construction
Types (All PPIs 100 in 12/03)
24
Cumulative Change in PPIs for Selected Highway
Inputs (All PPIs 100 in 12/03)
25
Cumulative Change in PPIs for Selected Building
Inputs (All PPIs 100 in 12/03)
26
Cumulative Change in PPIs for Selected Metal
Products (All PPIs 100 in 12/03)
27
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

28
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

29
Construction labor costs, availability

• Average hourly wages, 7/06-7/07 4.3
• Construction employment change -0.7
• -Residential construction -3.4
• (res building specialty trades)
• -Nonresidential construction 1.5
• (nonres building specialty trades, heavy
  civil engineering const.)
• Architectural, engineering services 3.2
• Nonfarm total jobs 1.4, wages 3.9

30
Construction labor outlook (12/07 vs. 12/06)

• 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)

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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.

32
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

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AGC Economic Resources (sign up by email to
simonsonk_at_agc.org)

• 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

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