WHAT WE LEARNED IN AUGUST: CONSTRUCTION INDUSTRY SLOW, RATE CUTS NEAR
Construction spending decreased, contractor confidence tumbled and construction job openings plummeted during the most recent months. Despite those signs of decaying momentum, backlog held steady in July, and rising nationwide unemployment and slowing inflation suggest that rate cuts are imminent. That will provide a much-needed boost to the industry.
MANUFACTURING PROJECTS DRIVE CONSTRUCTION SPENDING
Nonresidential construction spending fell for the second straight month in June but is just 0.4% below the all-time high established this April. Driven by ongoing megaprojects, the manufacturing segment accounted for nearly $1 in every $5 spent on nonresidential construction for the month. Even including the manufacturing segment, public sector projects continue to outperform the private sector, rising 7.2% during the past year compared to just 4.2%, respectively.
CONTRACTORS KEEP HIRING, LABOR SHORTAGES SHOW SIGNS OF EASING
The construction industry has added jobs at roughly twice the rate of the broader economy over the past year, and hiring has occurred at an even faster rate in the nonresidential segment. At the same time, job openings have plummeted nearly 30% during the past year. While this is partly due to easing economywide labor constraints, it is also due to cyclical factors. More new housing units were completed in June than in any month since the start of 2007, and that has eased the residential segment’s demand for workers.
BACKLOG HOLDS STEADY WHILE CONTRACTOR CONFIDENCE FALLS
ABC’s Construction Backlog Indicator held steady at 8.4 months in July but is 0.9 months lower than it was one year ago. Only the largest contractors, those with annual revenues greater than 0 million, have longer backlogs than they did last July. All three components of the Contractor Confidence Index declined in July, yet all three readings remain above 50, suggesting expectations for improvement over the next six months.
MATERIALS PRICE ESCALATION REMAINS TAME DESPITE JULY INCREASE
Construction input prices increased for the first time since April but were up just 1.1% on a year-over-year basis in July. Much of the monthly increase was driven by higher oil and natural gas prices.
LOOKING AHEAD
Inflation is now back below 3.0% on a year-over-year basis, and the unemployment rate has risen 0.8 percentage points during the past year. That sets the table for rate cuts at the Federal Reserve’s September meeting, and the only lingering question is whether they will lower the federal funds rate by 25 or 50 basis points. Construction industry momentum has waned in recent months, and lower borrowing costs and looser lending standards will provide a much-needed tailwind.
