Job losses slow but not in construction; outlook for hiring, lending appears bleak
September 8, 2009
Nonfarm payroll employment fell by 216,000 and the unemployment rate climbed to 9.7% in August, seasonally adjusted (9.6%, not seasonally adjusted), the Bureau of Labor Statistics (BLS) reported on Friday. The job drop overall was the smallest in a year, but construction employment fell 65,000, close to the average for the past three months. That decline accounted for 30% of the overall job loss, even though construction is only 5% of total payroll employment. Over the past year, construction shed 1,084,000 jobs (15% of its August 2008 total), nearly one-fifth of all jobs lost. For the fourth straight month, the 1.1% decline in nonresidential employment (nonresidential building, specialty trade contractors and heavy and civil engineering construction) exceeded the 0.9% drop in residential employment (residential building and specialty trades). The unemployment rate for construction workers was 16.5%, double the 8.2% rate of a year earlier and higher than any other industry. (Industry unemployment rates are not seasonally adjusted.) Architectural and engineering services employment, a harbinger of demand for nonresidential construction, dropped by 5,000, seasonally adjusted, half the monthly average over the past 12 months. Average hourly earnings in construction rose 3 cents to $22.66 in August, seasonally adjusted, a 12-month gain of 2.9%, compared to 2.6% for all private production or nonsupervisory employees.
"Employers expect a slight decrease in the rate of hiring when compared to Quarter 3 2009," Manpower Inc. reported today in summarizing a quarterly survey of 28,000 employers. "The fourth quarter net employment outlook for the U.S. is considerably weaker than one year ago at this time." Overall, 14% of employers expect to decrease total employment in the fourth quarter, vs. 12% who expect an increase, for a net employment outlook of -2%. The net reading was +2% in the third quarter and 9% in the fourth quarter of 2008. Employers in construction had the most negative outlook of 13 sectors, with 20% expecting to decrease total employment and only 10% expecting to increase total employment in the fourth quarter. In the third quarter, the industry had a slightly positive (+2%) net employment outlook. Regionally, the net outlook for construction ranged from -8% in the Northeast and South to -11% in the Midwest to -15% in the West.
"Even as the economy may be starting to recover, banks across the country are confronting a worsening outlook for their construction loans, an area that boomed for much of the decade," the New York Times reported on Friday. "Reports filed by banks with the Federal Deposit Insurance Corporation indicate that at the end of June about one-sixth of all construction loans were in trouble…It is in commercial real estate construction-be it stores or office buildings-that the pain seems likely to rise. At the end of June, $291 billion in such loans was outstanding, down only a few billion from the peak reached earlier this year. 'On the commercial side,' said Matthew Anderson, a partner in Foresight Analytics, a research firm based in Oakland, California, 'I think we are fairly early in the down cycle.' Foresight estimates that 10.4% of commercial construction loans are troubled, but expects that to increase as the year goes on….Foresight estimates the biggest problems are in loans for condominium construction, with 38% of all construction loans troubled. Mr. Anderson says even that might be an understatement….Foresight's estimates of the proportion of problem construction loans in the 20 largest metropolitan areas has one surprise: the one with the largest proportion of troubled loans is Seattle, where the recession has started to pinch. But it is also notable that just one of the 20 areas has less than 10% of construction loans in trouble. A year earlier, most of them were below that level."
A related problem is the soaring delinquency rate on commercial mortgage-backed securities, which rose to 3.14% in July, "more than six times its level a year earlier," the Wall Street Journal reported on August 31, citing credit-rating firm Realpoint LLC. "Mounting foreclosures in the CMBS sector would likely depress values even further as property is dumped on the market….The commercial-real-estate market could yet be salvaged by an improving economy and bailout programs coming out of Washington. [But] it is unlikely commercial real estate will benfit much from an early stage of an economic recovery. What landlords need is occupancy and rents to rise, and that means employers have to start hiring consumers need to shop more. So far, there are few signs this is happening."
"Uncertainty about future oil prices has put a freeze on many new energy-related construction projects" worldwide, the Journal reported today. "But deals that have managed to go forward are incurring dramatically lower costs, thanks to decreased demand for construction and engineering contractors, as well as such materials as cement bags and gas-carrying pipes….The Organization of Petroleum Exporting Countries…says member countries have put 35 exploration and production projects on the back burner and cut investment plans by $50 billion over the next five years….Meanwhile, the consulting firm IHS CERA figures that the costs to build new oil and gas facilities in general fell 8.5% over the first six months of 2009….Though squeezed by their clients, the contractors themselves can also take advantage of falling prices for raw materials and construction subcontracts, which together account for more than a quarter of the budget of an oil-and-gas infrastructure project….The cost-saving opportunity opened for some projects by the recession may not stay open for long, however….According to a July report by credit research agency Moody's, European steel prices-a key component of pipe-intensive projects"-have rebounded 25%, following a 60% drop earlier.