Construction Economic News

PPI jumps in June, falls from a year ago; vacancy rates soar; wind, solar projects stall

July 14, 2009

The producer price index (PPI) for finished goods jumped 1.8% in June, seasonally adjusted (1.9%, not seasonally adjusted), but was still down 4.6% from the June 2008 level, the Bureau of Labor Statistics reported today. The PPI for inputs to construction industries, a weighted average of materials used in all types of construction plus items consumed by contractors (such as diesel fuel)  rose 1.0% for the month, not seasonally adjusted, but dropped 6.0% over 12 months. Diesel, which soared 15% for the month but plunged 55% over 12 months, influenced the PPIs for various segments according to the relative importance of the fuel as an input. Thus, the PPI for inputs to highway and street construction climbed 3.0% and fell 11%; other heavy construction, 1.4% and -11%; nonresidential buildings, 0.9% and -6.6%; multi-unit residential, 0.5% and -4.6%; and single-unit, 0.2% and -2.0%. Other key materials showed divergent patterns: concrete products, 0.1% and 1.9%; asphalt paving mixtures and blocks, -0.6% and 2.7%; steel mill products, -0.7% and -38.5%; copper and brass mill shapes, 6.0% and -17.5%; aluminum mill shapes, 0.2% and -24%.

"Steel prices are on a paradoxical upswing - with more increases likely this summer - despite no real sign of resurging demand from any quarter and no vision into a manufacturing or construction recovery for years to come, industry executives say," the online newsletter Econoplay reported on Thursday. "The price of structural steel from the mill hit a low of $698 a ton in April and May then recovered to about $715 in June and July. But those prices are substantially below the $1,152 peak from last August," said John Cross, vice president for marketing of the American Institute of Steel Construction. Gerdau Ameristeel sent a letter to customers on Thursday announcing a $40-per-ton increase in reinforcing bar products, effective August 1.

Vacancy rates for income-producing properties, an indicator of future demand for construction, rose in the second quarter. "According to data released Wednesday by real estate research company Reis Inc., the average lease rate at shopping centers - defined as open-air centers and big-box centers as opposed to enclosed malls - in the top 77 U.S. markets declined in the [April-to-June period] for the fifth consecutive quarter," the Wall Street Journal reported on Friday. In the 29 years it has tracked the figures, Reis says it has never seen a stretch of declines that long. At enclosed malls, average lease rates declined for the third consecutive quarter. Store vacancies are also hitting multiyear highs." Citing another Reis survey, the Journal reported on July 7, "Office rents fell 2.7% in the second quarter from a year earlier, the largest single-quarter decline since the first quarter of 2002….Meanwhile, the office-vacancy rate rose to 15.9%, up from 15.2% in the previous quarter." Citing a third Reis survey, the Journal reported on July 8, "The vacancy rate for U.S. apartments hit a 22-year high in the second quarter….Rents fell the fastest in…New York [-5.8% from a year earlier] and San Jose [-5.1%], and in markets where many foreclosed homes and condominiums have been turned into rental property, including Las Vegas [-3.4%] and Orange County, California [-3.6%]. Vacancy rates nationally rose to 7.5% in the April-to-June period, up from 6.1% a year earlier….Markets with better employment prospects saw modest rent growth during the second quarter. Effective rents increased in the second quarter by 0.3% in suburban Maryland and in Washington, D.C."

Retail sales rose 0.6% in June, seasonally adjusted, but were 9.0% below June 2008 levels, the Census Bureau reported today. Retail chains that report "same-store sales" generally had dismal results in June compared to June 2008, according to reports released on Thursday. "But some apparel retailers appear to be onto a working strategy," the Journal wrote on Friday. "Aeropostale Inc. posted a 12% increase, continuing sales growth through emphasizing big promotional deals. Buckle Inc., a mall-based store focusing on denim, had a 9.6% sales jump, though did not extend a 22-month streak of double-digit growth." USA Today reported on Friday, "Aaron's, the second-largest retailer in the [rent-to-own] industry plans to open 200 stores in 2010 on the heels of an 18% increase in same-store sales last year….the largest rent-to-own chain, Rent-A-Center, is also thriving."

Wind and solar projects, which had been among the brightest construction niches, have run into difficulties with financing, in part because natural-gas prices have dropped 75% from a year ago. Last week, Boone Pickens announced he would postpone "for the foreseeable future" a plan to erect 667 wind turbines in Texas that he ordered in May 2008. "The solar-power industry, which was flying high just a year ago, spent the first half of 2009 announcing layoffs," the Journal reported on Thursday. "Some big solar-power projects were shelved. 'The vast majority of commercial projects are on hold,' said Rhone Resch, president of the Solar Energy Industries Association, noting that installations in California were down 60% in the first quarter compared with the year before….Inexpensive natural gas is generally bad news for renewable energy: Power plants that burn natural gas become even cheaper to operate when gas prices are low, making projects such as Mr. Pickens' planned wind farm less economical. Other clean-energy technologies, such as solar power, are even more expensive than wind." Some projects continue to win regulatory approvals. "The Public Service Commission of Wisconsin on Wednesday approved the [$497 million] Bent Tree Wind Farm plan by Wisconsin Power & Light Co., which will place about 120 turbines in Freeborn County, Minnesota," the (Wisconsin) Daily Reporter wrote on Thursday. But getting approvals and funding for transmission lines is stalling many projects.