Construction Economic News

Construction PPI rises moderately, IP improves; ARRA bonds help schools

September 17, 2010

The producer price index (PPI) for finished goods fell 0.1% in August, not seasonally adjusted (but rose 0.4%, seasonally adjusted) and 3.1% over 12 months, the Bureau of Labor Statistics (BLS) reported on Thursday. The PPI for construction inputs rose 0.2%, not seasonally adjusted for the month and 3.6% over 12 months. PPIs for finished buildings were nearly flat over 12 months; thus, contractors were paying more for materials but not passing the cost along. Specifically, the PPI for new school construction fell 0.2% in August but rose 0.9% for the year; industrial building construction, 0 and 0.2%; offices, 0 and -0.5%; and warehouses, -0.1% and -0.6%. Only two materials had large increases for the month: copper and brass mill shapes, 6.5% and 5.0% year-over-year, and diesel fuel, 5.8% and 13%. The PPI for steel mill products fell 3.9% in August but rose 17% over 12 months; asphalt paving mixtures and blocks, -0.6% and 7.9%.

Industrial production (IP) in manufacturing edged up 0.2% in August, seasonally adjusted, after climbing 0.7% in July, the Federal Reserve reported on Wednesday. IP for construction supplies rose 0.8% after a drop of 0.3%. Capacity utilization in manufacturing, which along with rising IP can indicate possible demand for factory construction, inched up to 72.2% of capacity in August from 72.1% in July but remained far below the long-term average of 79.2%

"Almost no grant funding from the State Stabilization or Government Services funding [from the 2009 American Recovery and Reinvestment Act (ARRA)] has been spent on school construction, although it was an allowable use." The 21st Century School Fund reported on Monday (newsletter@21csf.org). "School districts have taken advantage of $6.6 billion in Qualified School Construction Bonds [, 30% of the] $22 billion available to the 50 states, outlying areas and the 100 largest low-income local education agencies….School districts have also been using another ARRA financing subsidy.  According to www.recovery.gov, there have been nearly $126.8 billion in [Build America Bonds (BABs)] issuances as of September 3, with approximately $14.3 billion used by public school districts and authorities ([11%;] only projects easily identified for PK-12 schools totaled)."

The National Association of Home Builders (NAHB) reported on Tuesday that its "Multifamily Market Indices (MMI) show that current and expected demand for rental apartments improved significantly in the second quarter of 2010 compared to the first quarter. The current indexes for Class A, Class B and Class C apartments rose to 59.5, 57.6 and 56.6, respectively, increases of more than 15 points [from] the first quarter and the highest level since 2007. Builders' expectations for demand in the next six months increased to similar levels. The MMI measures multifamily builder sentiment based on production and occupancy at the current time, as well as builders' expectations for conditions over the next six months. An index number greater than 50 indicates that the number of builders who view conditions as getting stronger outnumbers those who view conditions as becoming weaker." The current production index for market-rate apartments rose to 34 from 30 a quarter earlier, but increased significantly from 17 a year earlier. For lower-rent units, the current production index slipped from 35 in the first quarter to 33, yet was an improvement over the 22 a year earlier.   The current production index for condominiums for sale sank to 14.5 from 21.5 the previous quarter, to about the same level as a year earlier (15.2). Builders' expectations for starts six months from now are at similar, but slightly higher, levels for all three categories. "Lenders have been unwilling to fund multifamily development, because the  inventory of rental housing expanded from traditional multifamily communities to foreclosed and investor-owned single-family homes made available for rent as a means of creating a temporary cash flow until the homes can be sold," said NAHB Chief Economist David Crowe,. "As the supply of additional units declines and pent-up household formations re-emerge when the labor markets improve, demand for traditional rental apartments will rise."

Employee tenure, measured as the median number of years that wage and salary workers have been with their current employer, was 4.0 years in January 2010, up from 3.6 years in January 2008 and January 2006, BLS reported on Tuesday. "The increase in tenure among those at work reflects, in part, relatively large job losses among less-senior workers in the most recent recession. Tenure in the construction industry, which started losing employees on net in September 2006, rose from 3.0 years in 2002, 2004 and 2006 to 3.5 years in 2008 and 4.2 years in 2010. This rapid increase suggests a large decline in younger, less experienced construction workers, which may exacerbate problems for contractors in a few years when they need to replace retiring older workers.

Private industry employers spent an average of $27.64 per hour worked for employee compensation in June, with wages and salaries accounting for $19.53 (71%) and benefits the remaining $8.11 (29%), BLS reported on September 8. Construction employers paid an average of $31.44 (14% more than the private-sector average), of which wages constituted $21.73 (11% more) and benefits $10.84 (34% more). Construction employers paid an average of $2.20 per hour for health insurance (vs. $2.08 for all private industry), $1.80 for social security and Medicare (vs. $1.64), $1.68 for retirement and savings (vs. $0.96), $1.38 for workers' compensation (vs. $0.44), and $1.14 for paid leave (vs. $1.86).