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Keeping house: nonresidential construction flourishes, but slow housing starts and credit woes put downward pressure on the construction market.


The construction industry of 2007 has been something of a see-saw, with total spending numbers depending largely on the margins between the high-rising nonresidential sector and sluggish residential construction.

Month after month, the pattern has repeated residential housing starts continue to falter, and some months, the surge in nonresidential building is enough to make up for the housing slump--in other months, it isn't.


As of press time, the latest construction industry numbers released by the U.S. Census Bureau Noun 1. Census Bureau - the bureau of the Commerce Department responsible for taking the census; provides demographic information and analyses about the population of the United States
Bureau of the Census
 reported an increase of 0.2 percent in total construction spending Construction Spending

An economic indicator that measures the amount of spending towards new construction. Released monthly by the U.S. Department of Commerce's Census Bureau, it looks at residential and non-residential construction in the private sector, and state and federal at
 in August. The seasonally adjusted Seasonally adjusted

Mathematically adjusted by moderating a macroeconomic indicator (e.g., oil prices/imports) so that relative comparisons can be drawn from month to month all year.
 annual rate of $1.167 trillion saw an increase over the revised total from the previous month, but the figure was still down 1.7 percent from the same time period last year.

According to according to
1. As stated or indicated by; on the authority of: according to historians.

2. In keeping with: according to instructions.

 Ken Simonson, chief economist The Chief Economist is a single position job class having primary responsibility for the development, coordination, and production of economic and financial analysis. It is distinguished from the other economist positions by the broader scope of responsibility encompassing the  for the Associated General Contractors Associated General Contractors of America is the nation's oldest and largest trade association representing the construction industry. It was formed in 1918 following a request by President Woodrow Wilson.  of America (AGC AGC Automatic Gain Control
AGC Automotive Glass Cartridge (fuse)
AGC Associated General Contractors
AGC Associated General Contractors of America
AGC Atypical Glandular Cells
AGC Attorney-General's Chambers
), private residential construction spending fell 1.5 percent--the 18th consecutive monthly decrease--while private nonresidential construction increased 2.3 percent. This gain was accompanied by a 0.7 percent increase in public construction.

According to Simonson, the nonresidential sector has played a large part in bolstering the entire industry. Referring to the October employment report issued by the Bureau of Labor Statistics Bureau of Labor Statistics (BLS)

A research agency of the U.S. Department of Labor; it compiles statistics on hours of work, average hourly earnings, employment and unemployment, consumer prices and many other variables.
, Simonson says, "Today's employment report shows nonresidential construction is still boosting the economy, despite the homebuilding meltdown meltdown

Occurrence in which a huge amount of thermal energy and radiation is released as a result of an uncontrolled chain reaction in a nuclear power reactor. The chain reaction that occurs in the reactor's core must be carefully regulated by control rods, which absorb

"Seasonally adjusted total construction employment fell 14,000 in September, and that was down 112,000 or 1.5 percent compared to September 2006," he continues. "But that masks divergent trends in nonresidential and residential construction."

Simonson says the employment pattern of the two sectors mirrors the balancing act spending patterns on the surface. "The BLS See Bureau of Labor Statistics.  numbers show that over the past 12 months, employment in the three nonresidential categories--nonresidential building, specialty trades, plus heavy and civil engineering--climbed 42,000 or 1 percent," he says. "Meanwhile, residential building and specialty trades employment supposedly shed 154,000 jobs or 4.5 percent. That gap, while large, vastly understates the actual difference," he says. "Census Bureau figures for August show residential construction spending was down 16 percent from a year before, and nonresidential was up almost 15 percent. With all signs pointing to still less homebuilding ahead, it's likely that residential employment is also down roughly 16 percent. That means about 400,000 'residential' specialty trade contractors are now doing nonresidential electrical, plumbing and other work."

Simonson says that reclassifying these workers would show nonresidential construction has actually added more than 10 percent to its payrolls. "Moreover, the BLS report shows there is more growth ahead. Architectural and engineering employment rose 3 percent in the past 12 months. Their output will turn into construction jobs in the next several months."


Construction employment isn't the only aspect of the market suffering from levels of uncertainty and bleak outlooks. Simonson says market watchers can expect the cost of that labor as well as the cost of construction materials, to increase as well in the coming year.


The AGC released its fifth Construction Inflation Alert in early October, warning owners, budget setters and contractors to expect larger materials and labor cost increases in 2008 than they have experienced in the past 12 months.


"Nonresidential construction has had a banner year so far in 2007, and we've seen spending on nearly every segment increase compared to 2006, despite the plunge in homebuilding," says Simonson. "The materials cost surges that plagued the industry in 2004-2006 have slowed dramatically, and labor remains available in most markets."

Simonson warned that many observers expect that the end of the calm is coming soon. "The worsening slide in homebuilding and turmoil in the credit markets threaten some types of nonresidential construction. At the same time, some materials costs are beginning to turn up again, and labor costs have started to accelerate," he says.

The cumulative increase in producer price index (PPI (1) (Pixels Per Inch) The measurement of the resolution of a monitor or scanner. For example, a monitor that is 16 inches wide and displays 1600 pixels across its width would have a resolution of 100 ppi (1600 divided by 16). ) for construction input since December 2003 (28 percent through August 2007) remains more than double the 13 percent increase in the most common measure of overall inflation, the consumer price index (CPI (1) (Characters Per Inch) The measurement of the density of characters per inch on tape or paper. A printer's CPI button switches character pitch.

(2) (Counts Per I
) for all urban consumers. Labor costs, in contrast, have risen at a similar rate for construction and for the private sector as a whole.

The cumulative difference matters because the estimates for many projects now being bid, especially in public facilities, were prepared in 2003-2005 under the assumption that construction costs would escalate at the same rate as the CPI. That divergence explains why some projects are being canceled, delayed or entirely redesigned.

"The housing meltdown and the more recent credit market turmoil do have some spillover spill·o·ver  
1. The act or an instance of spilling over.

2. An amount or quantity spilled over.

3. A side effect arising from or as if from an unpredicted source:
 effects on nonresidential construction," notes Simonson. "Retail, suburban office and local government construction are especially affected by the drop in homebuilding, home sales and property values, respectively. Tighter lending standards and financial-firm layoffs will trim construction of offices and other income-producing properties, such as hotels and warehouses."

Meanwhile, the nonresidential industry has benefited from greater availability of specialty trade workers who have lately shifted from residential work. Simonson adds, "But wages have begun rising more steeply for specialty trade contractors, suggesting that the number of workers suitable to switch is close to exhaustion. In the next several months, the rate of wage increases is likely to reach 5 to 5.5 percent, up from a recent 4.5-percent gain."

Labor costs are likely to accelerate further as well if residential building begins to draw back specialty trade contractors to late 2008. "Construction wages could go up 5 percent to 6 percent annually for several years beginning in 2008," Simonson says.

Simonson addressed additional concerns over the rising costs of doing business in the construction industry with other industry experts earlier this year during an audio conference sponsored by the AGC.

GROWING PAINS grow·ing pains
Pains in the limbs and joints of children or adolescents, frequently occurring at night and often attributed to rapid growth but arising from various unrelated causes.

Strong economic growth is likely to keep many construction materials' inventories tight and prices high in the near future, according to Jason Schenker, Chief Economist, Wachovia, who also participated in the audio conference.

Schenker said market analysts are seeing indicators of strong growth in U.S. gross domestic product (GDP GDP (guanosine diphosphate): see guanine. ) and worldwide GDP. "What does this mean?" he asked. "In the near term, it means greater upside risks for commodity markets, especially markets with tight inventories," like metal markets.

Nickel stainless is among materials commanding the highest prices on the market today, said Bob Garino, Economist, Institute of Scrap Recycling Industries (ISRI ISRI Institute of Scrap Recycling Industries
ISRI Institute for Software Research, International (Carnegie Mellon University)
ISRI Information Science Research Institute
ISRI Intelligent Systems Research Institute
), who also participated on the panel. "Nickel is the one market that has outperformed all other LME See London Metal Exchange.


See London Metal Exchange (LME).
 metals," Garino said. "Stainless production continues to set the pace, and U.S. mills U.S. Mills is a packaged food products company specializing in natural, organic, and specialty cereals, cookies, and crackers. Their products are sold through supermarkets, wholesale grocers, and natural food distributors nationwide.  continue to struggle with high prices and soft orders."


He added that prices are so high that consumers are looking for Looking for

In the context of general equities, this describing a buy interest in which a dealer is asked to offer stock, often involving a capital commitment. Antithesis of in touch with.
 substitutes for nickel-containing stainless. "People looking to alternatives, and once consumers get used to that and find performance is good enough, it's going to be tough for the market to switch back," he said.

Global steel markets, paced by Chinese production, are supplying plenty of steel, Garino said. "Last year, more than 1.3 billion short tons were produced globally," he said. "This year global production is expected to increase by 5 percent or more, another 70 million tons looking for homes." Overall market sentiment Market Sentiment

The feeling or tone of a market (i.e. crowd psychology). It is shown by the activity and price movement of the securities.

For example, rising prices would indicate a bullish market sentiment.
 has cooled regarding finished steel demand for flat rolled products and scrap prices response, and market analysts have developed a more conservative third quarter outlook, according to Garino.

Asphalt prices, which are tied to the price of crude oil, will also remain high by historic standards for the near future, added the AGC's Simonson.

On the other end of the pricing spectrum, the market for gypsum gypsum (jĭp`səm), mineral composed of calcium sulfate (calcium, sulfur, and oxygen) with two molecules of water, CaSO4·2H2O. It is the most common sulfate mineral, occurring in many places in a variety of forms. , used widely in both home construction and non-residential buildings, is likely to remain very weak. Prices have begun to fall and are likely to remain down, according to Simonson, based on the lagging construction market in the U.S.

Schenker added that PVC PVC: see polyvinyl chloride.
 in full polyvinyl chloride

Synthetic resin, an organic polymer made by treating vinyl chloride monomers with a peroxide.
 and other products tied to oil and natural gas are also likely to experience climbing, if not surging, prices. "As long as oil remains high and long as natural gas prices trend upward, it's hard to imagine significant price alleviation on PVC," he said. "PVC prices are driven by natural gas, and there is some softening in demand from residential demand, but there is much nonresidential and non-construction demand so we'll continue to see high prices."

Given the economic outlook, the analysts agreed that markets for many materials used in the construction industry will remain tight, leading to higher prices. "These markets are about supply and demand," said Garino. "When supply is tight and growth continues and that means risks are to the upside. There are some very expensive raw materials out there."

The AGC's Simonson says he expects growth to continue in the nonresidential sector. "In the year ahead, I expect some pullback Pullback

A falling back of a price from its peak. This type of price movement might be seen as a brief reversal of the prevailing upward trend, signaling a slight pause in upward momentum.
 in office, retail and hotel construction, but more growth in energy, power and hospital work," he says. "Highway construction is also vulnerable unless Congress and the states add more revenue to fund highway programs. And accelerating costs of labor and materials labor and materials (time and materials) n. what some builders or repair people contract to provide and be paid for, rather than a fixed price or a percentage of the costs.  will again be tough for contractors, private owners and public agencies doing construction."

The author is associate editor of Construction & Demolition Recycling and can be contacted at
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Author:Gubeno, Jackie
Publication:Construction & Demolition Recycling
Date:Nov 1, 2007
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