Construction Economic News

Credit turmoil halts some projects; McGraw-Hill, AIA, state job reports are mixed

September 22, 2008

The upheaval in credit markets has cut off the flow of funds to some developers, and a few contractors have stopped work on jobs, according to scattered reports. "In the short term, businesses in partnership with Lehman Brothers Holdings and American International Group, which had over $50 billion invested in commercial real estate around the country, had their deals threatened," the Associated Press reported on Thursday. "Lehman and AIG were investors in many large real-estate deals." On Wednesday, AP reported, "Already stalled in its plan for a $2 billion mega-casino in Atlantic City, Las Vegas-based Pinnacle Entertainment said Tuesday it was ending its bid to run a [$624 million casino resort and 500-room hotel in Wyandotte County Kansas], citing ‘the current turmoil in the financial markets.’" The turmoil may affect construction through two mechanisms. One is a resumption—or further tightening—of commercial loans to developers and of tax receipts to state and local governments. The second is a change in demand for different types of projects, such as offices and retail, as jobs and consumer spending either get back on track or drop further.

"Credit market troubles have forced officials to scrap an innovative plan to fix hundreds of Missouri's worst bridges, thwarting what was to serve as a national roadmap for quickly renovating aging infrastructure," AP reported on Friday. "The plan would have awarded a single contract to finance, design and build 802 bridges within five years and then maintain them for the next 25 years. The state would have made annual payments to the contractor….Though the private contracting teams offered good proposals, ‘they simply could not overcome the burden of a financial market that has melted down,’ said Pete Rahn, director of the Missouri Department of Transportation. The Missouri Highways and Transportation Commission, the board that governs the DOT, instead decided Thursday to issue its own bonds to finance the bridges, which it pledged still would get rebuilt or repaired within five years."

Two recent private surveys and other reports indicate a mixed outlook for construction. New construction starts slipped 3% in August, seasonally adjusted, and were down 15% year-to-date (YTD) in January-August 2008 compared to the same period of 2007, McGraw-Hill Construction (MHC) reported on Wednesday, based on its private data collection. Residential starts fell 12% for the month and 38% YTD; nonresidential building gained 17% in August and 5% YTD; and nonbuilding construction fell 20% for the month but was nearly unchanged YTD. MHC figures tend to fluctuate because the full value of new projects is counted in the month they start. In August, the totals included a $3.5 billion steel-processing facility in Alabama, a $2.4 billion coal-gasification plant in Indiana, the $800 million Concord Casino/Hotel and Convention Center in the Catskills region of New York, and a $160 million ethanol plant in Iowa. The Renewable Fuels Association (www.ethanolrfa.org) currently lists 32 ethanol refineries under construction. Eastman Chemical Co. "is spending $1.3 billion to upgrade its sprawling chemical plant [in Kingsport, Tennessee]; Deere is spending a total of $187 million at its Waterloo [Iowa] plant to increase output of large tractors" and Cummins Inc. has been expanding output and production in Columbus, Indiana, the Wall Street Journal reported on September 11.

The American Institute of Architects reported on Wednesday that its Architecture Billings Index signaled for the seventh straight month in August that more respondents had lower billings than higher billings. As with the previous seven months, firms with an institutional practice reported a reading above 50, whereas firms with residential, commercial/industrial or mixed specializations remained below 50. “With business conditions remaining weak, [55% of] panelists report that backlogs at their firm are either modestly or substantially lower than they were at the beginning of the year. Just one-fifth indicated that backlogs are higher now than they were in early 2008,” AIA said.

Seasonally adjusted employment increased in 32 states and the District of Columbia and decreased in 18 states from July to August, the Bureau of Labor Statistics (BLS) reported on Friday. Data was collected before Hurricanes Fay, Gustav, Hannah and Ike. Compared to August 2007, employment rose in 27 states plus D.C. and decreased in 23 states. The largest year-over-year percentage increases were in D.C., 3.2%; Texas, 2.4%; Wyoming, 2.0%; South Dakota, 1.8%; and North Dakota, 1.6%. The largest decreases were in Rode Island, -2.6%; Arizona, -1.95; Michigan, -1.6%; Florida, -1.2%; Indiana, -1.1%; and Georgia, -1.0%. Seasonally adjusted construction employment rose for the month in 15 states plus D.C., fell in 23, and was unchanged (or within 100 of prior levels) in 12. Compared to August 2007, construction employment rose in 11 states, fell in 37, and was within 100 of prior levels in D.C., Tennessee and Mississippi. The largest year-over-year percentage gains were in Texas, 3.7%; Wyoming, 3.0%; N.D. and S.D., 2.6% each; and Oklahoma, 2.5%. The largest declines were in Arizona, -16%; Utah, -14%; South Carolina and Florida, -13% each; and Oregon, -11%.

The consumer price index (CPI) for all urban consumers fell 0.1% in August, seasonally adjusted (-0.4% unadjusted) and rose 5.4% over 12 months, BLS reported on Wednesday. The CPI for urban wage earners and clerical workers (CPI-W), which is used to adjust many construction and other labor contractors, rose 5.9% over 12 months. Prices were collected before Hurricane Ike hit. Ike appears not to have caused major disruptions of construction supplies, although shipments of some construction plastics have been affected by power and transport outages.

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