Construction industry news

Nonresidential construction shows employment slide
Commercial construction spending increases
Globalization, weak dollar, drive unprecedented
   rise in steel prices

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Nonresidential construction shows employment slide
The Associated Builders and Contractors (ABC) reports that nonresidential building construction suffered additional job losses in May as employment declined by 5,900 jobs on a seasonally-adjusted basis, according to the June 6 employment report by the U.S. Department of Labor's Bureau of Labor Statistics. Over the 12-month period from May 2007 to May 2008, seasonally-adjusted, nonresidential building construction employment was down by 30,000 jobs.

The downward trend in the nonresidential sector pales in comparison to those generated among firms operating in the residential building sector. Between May 2007 and May 2008, residential building contractors shed slightly more than 100,000 positions.

Total construction employment in May 2008 was 386,000 lower than in May 2007, a decline exceeding 5 percent. In terms of monthly comparison, total construction employment fell by 34,000 jobs in May and 33,100 in April. Since an employment peak in September 2006, construction has lost 475,000 jobs ending in May. Total building construction is down by 130,800 jobs over that same period, or by 7.4 percent on a seasonally-adjusted basis.

The most remarkable aspect of the May job report was the unexpectedly sharp increase in national unemployment. The unemployment rate rose from 5 percent in April to 5.5 percent in May. Total nonfarm payroll employment also continued to trend lower, falling by 49,000 in May compared to April. The change in April employment was also revised lower, from an initial reading of a decline of 20,000 jobs to a decline of 28,000 jobs.

What's new
ABC economic reporters note that the June 6 report will shift the debate about whether the U.S. is or is not in a recession – toward those economists who believe the nation is currently in a recession or is headed into one. The marked increase in unemployment is likely to further suppress both consumer confidence and spending in the months ahead, despite the recent national distribution of tax rebate checks.

Because indices for many nonresidential construction segments lag behind the nation's other economic indicators, today's report could also be interpreted as a precursor of nonresidential construction's near-term future. Despite the positive news from April's nonresidential construction spending report, ABC suggests that there may be further slowing of many nonresidential construction activities through the balance of 2008 and into 2009.

Commercial construction spending increases
Despite the continued slump in residential construction, nonresidential construction spending has risen nearly 12 percent over the past year and was up 0.7 percent in April, according to the June 2 U.S. Department of Commerce construction spending report.

Total nonresidential construction spending achieved another all-time high in April ($678 billion) and private nonresidential construction spending was up 15.4 percent for the year and 1.6 percent compared to March. Estimates are provided on a monthly, seasonally-adjusted basis.

Of the16 reported nonresidential sectors, 13 produced year-over-year spending gains, with the largest growth in lodging (41.8 percent), public safety (27.4 percent), manufacturing (25.7 percent) and power (22.5 percent).

Three nonresidential segments experienced reduced construction spending activity over the past 12 months. These were religious construction (down 7.5 percent), water supply construction (down 7.3 percent) and commercial construction (down 0.2 percent). On a monthly basis, 11 of 16 nonresidential subsectors reported increased spending.

Total construction spending, both nonresidential and residential, was $1.121 trillion in April on a seasonally-adjusted, annualized basis. This represents a 0.4 percent decline from a month earlier and a 3.9 percent fall from April 2007.

What this means
According to Associated Builders and Contractors, despite an economy expanding at less than 1 percent on an annualized basis and sagging consumer and business sentiment, the level of nonresidential construction spending continues to rise. The nonresidential construction sector appears to be a beneficiary of America's need to adjust to new realities, including higher energy prices and a weaker U.S. dollar. Given the sustained increase in energy prices, construction spending related to power generating facilities will continue to be a source of strength to the industry as America looks to build its capacity to be more fully self-sufficient.

In addition, manufacturing continues to be a source of considerable growth in nonresidential construction spending due to the ongoing surge in export activity, as well as the desire of goods producers to operate more energy-efficient facilities. Manufacturing will also continue to be a source of significant business to the nonresidential construction industry in the quarters ahead.

The outlook for other nonresidential construction spending segments is decidedly less clear as economic weakness persists, including the areas of lodging and the office segment.

Globalization, weak dollar, drive unprecedented rise in steel prices
Steel, the primary component used to manufacture scaffolding, has faced record cost increases in 2008. According to Ed Karasz of Allied Tube and Conduit, a major supplier of scaffold tubing in the U.S., “mechanical tubing…has increased in cost over 85 percent this year as a result of demand for steel coil exceeding capacity on the world market by at least 20 percent. Just getting coil at any price has become in many cases nearly impossible.”

According to USA Today (May 13, 2008), several factors appear to be contributing to this unprecedented rise in steel prices. U.S. manufacturers use about 130 million tons of steel a year, of which only about 110 million tons are produced domestically. Typically, imports cover the shortfall, but global growth has resulted in stiffer competition for the available resources. Traditional exporters like Russia, India and China are making drastic improvements to their own infrastructures, tying up much of the steel that would once have found its way to the United States. In March 2008, steel imports to the U.S. declined by 17 percent compared to the same period last year, according to Purchasing magazine (April 30, 2008).

Meanwhile, the weak dollar makes international markets attractive to American steel manufacturers, who are able to make more money overseas, says Karasz. At the same time, U.S companies are becoming prime targets for buyouts by foreign steel manufacturers. According to Mark Parr, analyst at KeyBanc Capital, more than half the nation’s steel mills are owned by foreign companies that are more likely to export to their home countries than to sell to interests in the U.S.

“It’s a sellers’ market right now,” says Bob Richard of Longbow Research. According to American Metal Market Research (April 2008), the cost of hot-rolled steel coil has risen from $580/ton to $1,050/ton over the last year. Price per ton for domestic and imported hot-rolled coil is expected to top $1,100 by late summer of 2008.

Parr does not foresee steel prices dropping anytime soon. Even with a handful of new mills opening domestically, manufacturers cannot meet demand. “Basic materials cycles last decades,” says Parr. “We’re [only] five years into this [one].”

If steel prices continue to rise, scaffold manufacturers and other manufacturers that use steel in their products will be left with limited options. Maintaining reasonably high standards of safety and quality will inevitably lead to an increase in cost to manufacturers, as well as to consumers at every level.

Bil-Jax CEO Jeff Ott suggests that scaffold customers protect themselves from rising costs by securing their purchases now as opposed to waiting. “It is clear that scaffolding prices will continue to rise given the nearly 100% increase in steel in 5 short months with no end in sight,” says Ott. “Scaffolding bought today will only cost more in the foreseeable future.”