Sorting Out the Outlook for Construction and Materials

Transportation Estimators Assn., St. Louis Prepared October 3, 2007

Ken SimonsonChief Economist

Associated General Contractors of Americasimonsonk@agc.org

Current economic influences

• Moderate real GDP growth (2-3%)

• Low inflation (CPI change 1.5-2.5%)

• Moderate job growth, low unemployment (avg. 150,000 jobs/mo., 4.6% unem rate)

• Rising real wages, personal income (2%)

• Worries about housing, credit, falling dollar

The shifting construction market

Segment 2006 8/07Total (tril. $, SAAR) $1.19 $1.17% of total

Private residential 54% 45%New SF 35 26New MF 4 4Improvements 14 15

Private nonres. 25 30Public 21 25

Current housing situation

• Aug. spending: -1.5% vs. Julye, -17% vs. 8/06• Aug. permits: -5.9% vs. July, -24% vs. 8/06• Aug. starts: -2.6% vs. July, -19% vs. 8/06• Aug. new-home sales: -8% vs. July, -21% vs.

8/06• Aug. jobs: -23,000 vs. July, -155,000 vs. 8/06• Inventories, time on market remaining high

Single-family (SF) vs. multifamily (MF)

• Aug. construction spending (value put in place):SF: -3.3% vs. July, -26% vs. 8/06 MF: -0.3% vs. July, -5.3% vs. 8/06

• August housing starts :SF: -7.1% vs. July, -27% vs. 8/06MF: +13% vs. July, +14% vs. 8/06

• August building permits :SF: -8.1% vs. July, -28% vs. 8/06MF: unchanged vs. July, -15% vs. 8/06

Housing outlook

• SF: No end yet to decline in permits, starts or spending

• Don’t expect upturn before middle of ‘08

• MF: Rental construction cushioned the fall in condo starts but now many owners are trying to rent out houses and condos

• Rate cut helps some buyers/homeowners but won’t cure credit fraud worries

Nonres ’06 totals, shares, ’07 YTD change

Nonresidential total $545 billion 100% +14%

Educational $86 billion 16% +14%Commercial $76 billion 14% +15%Highway & street $72 billion 13% + 5%Office $55 billion 10% +21%Healthcare $40 billion 7% +15%Power $39 billion 7% +22%Manufacturing $34 billion 6% + 6%Transportation $27 billion 5% +11%Sewage & waste disposal $23 billion 4% + 6%Communication $21 billion 4% +20%Amusement & recreation $18 billion 3% + 9%Lodging $18 billion 3% +64%Other 7% (water; public safety; religious; conservation)

Nonresidential segments

(listed in descending order of public +

private spending in 2006)

• Jan-Aug ’07 year-to-date (YTD) share and growth from Jan-Aug ’06 to Jan-Aug ‘07

• Major influences

• Outlook for ’07 and ’08

Educational

• 16% of public + private nonres. spending YTD; YTD change Jan-Aug ‘06 to Jan-Aug ‘07: 14%

• Falling primary school enrollment; rising high-school, college, continuing ed

• K-12 affected by property taxes, house values• Private school/college spending affected by

stock market (through endowment return, gifts)• 2007 forecast: 9-11% (record bond issues in ‘06;

momentum from 2005-06 revenues; stock gains)• 2008 forecast: 3-6% (slower revenue growth)

Commercial (retail, warehouse, farm)

• 14% of YTD total; 15% YTD growth • Led by multi-retail (gen. merchandise, shopping

centers, malls), 16% YTD growth• Neighborhood retail follows new housing; other

segments affected by home sales or remodeling: furniture, appliance, yard/garden sales

• 2007: +8-10% (personal income still rising but less new local, auto-, and housing-related)

• 2008: +4-7% (expanding GDP but tighter credit)

Highway and street

• 12% of YTD total; 5% YTD growth

• Boosted by 8/05 passage of SAFETEA-LU

• CBO projects big deficit starting 10/08

• 2007: +5-8% (flatter fuel tax receipts, slight relief on materials costs)

• 2008: 0-5% (depends on receipts, costs)

Office

• 11% of YTD total; +21% YTD growth• Rebound from weak 2001-05• Vulnerable to reduced demand from RE

agents, mortgage brokers, title companies• Tighter credit; large-firm mergers, job cuts

threaten many large-office markets• 2007: +10-14% (leveling of vacancy rates,

modest job growth)• 2008: +0-5% (’06 projects end, fewer new)

Power

• 8% of YTD total; +22% YTD growth

• Private electric power has ended 5-year slump: +22% YTD growth; public +26%

• New plants, transmission lines; retrofits

• Wind, solar growing but from small base

• 2007: +20% (retrofits, new plants, alternatives)

• 2008: more of the same (+15-25%)

Healthcare (hosp., med. bldg., special care)

• 7% of YTD total; +15% YTD growth

• Led by private hospitals, 16% YTD growth

• Technology, new housing driving hospital (re)construction; seismic retrofit in CA

• Budget constraints, decline of employer-funded care may slow hospital demand

• 2007: +12-15%

• 2008: +10-15%

Manufacturing

• 6% of YTD total; +6% YTD growth

• Catching up from 1998-2004 slump

• Strong shipments, high capacity utilization

• Long lead times on refineries, mining, cement plants; aircraft, heavy equipment

• 2007: +5-10% (less automotive, pharma; more export-oriented plants, foreign inv.)

• 2008: 4-8% (big jobs continue; fewer new)

Transportation facilities

• 5% of YTD total; +11% YTD growth

• Driven by growth in passengers & freight

• Slower economic growth in 2007 implies less expansion

• 2007: +5-8% (trucking, rail slowdown)

• 2008: +5-8% (more airport, port work)

Lodging

• 5% of YTD total; +64% YTD growth

• Driven by higher room and occupancy rates; likely to flatten by end of ‘07

• Rebound from 2000-01 recession, post-9/11 travel slump

• 2007: +40-60% (more growth in business, leisure, foreign travelers)

• 2008: -5 to +5% (depends on credit)

Communication

• 4% of YTD total; +20% YTD growth

• Carriers consolidating but also upgrading

• 2007: +15-20%

• 2008: +10-15% (same trends continue)

Sewage & waste disposal

• 4% of YTD total; +6% YTD growth

• Housing slump means fewer new lines

• Major plant and CSO upgrades

• 2007: +4-6%

• 2008: +1-5% (continued housing impact)

Amusement & recreation

• 3% of YTD total; +9% YTD growth

• Very diverse: sports venues, playgrounds, parks, convention centers, theaters

• 2007, 2008: ? (big stadium projects, bond issues passed in 2006 but flatter public revenues)

Materials and components

• Higher increases until recently for construction inputs than for overall economy:

12 mo. to: 12/04 12/05 12/06 8/07Const PPI 9.1% 8.2% 4.6% 1.6%CPI-U 3.3% 3.4% 2.5% 2.5%• Higher cumulative change from 12/03 to 8/07:Const PPI 28%CPI-U 13%• PPI drivers: steel, gypsum, diesel, asphalt,

concrete, copper, plastics, aluminum, wood

95

100

105

110

115

120

125

130

12/03 12/04 12/05 12/06

Perc

ent of

12/

03 L

evel

CPI-U PPI for Finished Goods Inputs to Construction Industries

Cumulative Change in Consumer, Producer & Construction Prices(All PPIs = 100 in 12/03)

08/07

90

100

110

120

130

140

150

12/03 12/04 12/05 12/06

Per

cent of 12/0

3 L

evel

CPI-U Highway & Street Construction

Other Heavy Construction Nonresidential Buildings

Multi-Unit Residential

Cumulative Change in PPIs for Construction Types(All PPIs = 100 in 12/03)

08/07

75

100

125

150

175

200

225

250

275

12/03 12/04 12/05 12/06

Perc

ent of

12/

03 L

evel

CPI-U #2 Diesel Fuel Asphalt Paving Mixtures & Blocks Concrete Products

Cumulative Change in PPIs for Selected Highway Inputs(All PPIs = 100 in 12/03)

08/07

90

100

110

120

130

140

150

160

170

12/03 12/04 12/05 12/06

Perc

ent of

12/

03 L

evel

CPI-U Plastic Construction Products

Gypsum Products Lumber & Plywood

Cumulative Change in PPIs for Selected Building Inputs(All PPIs = 100 in 12/03)

08/07

75

100

125

150

175

200

225

250

275

12/03 12/04 12/05 12/06

Perc

ent of

12/

03 L

evel

CPI-U Steel Mill Products

Copper & Brass Mill Shapes Aluminum Mill Shapes

Cumulative Change in PPIs for Selected Metal Products(All PPIs = 100 in 12/03)

08/07

Outlook for materials (3-6 months)

• Falling prices: wood, gypsum products; perhaps plastics

• Likely to rise: diesel, asphalt, copper

• No shortages but longer lead times for some items

• Year-over-year PPI change: 3-5%

Outlook for materials (1-5 years)

• Construction remains dependent on specific materials

• Same materials in demand worldwide, with uncertain supply growth (e.g., copper, oil)

• Construction requires physical delivery

• Thus, industry is subject to price spurts, transport bottlenecks, fuel price swings

• Expect 6-8% PPI increases, higher spikes

Construction labor costs, availability

Average hourly earnings, 8/06-8/07: +4.5%• Construction employment change: -1.2%

-Residential construction : -4.5%(residential building & specialty trades)

-Nonresidential construction: +1.5%(nonres building & specialty trades,

heavy & civil engineering const.)• Architectural, engineering services: +2.9%• Nonfarm total: jobs +1.3%, wages +3.9%

Construction labor outlook (12/07 vs. 12/06)

• ‘Official’ rise in nonres. employment: 2-4%

• ‘Official’ decline in res. employment: 4-6%

• + 400-500K ‘res’ specialty trades in nonres

• = Actual nonres. employment rise: 11-16%

• Actual res. employment loss: 16-20%

• Wage increase: 5% (partly due to greater proportion of nonres., hence higher-paid)

Summary for 2007

• Total const. spending: -6% to -3%

Res: -15% to -20% (huge drop in new SF; MF and improvements down slightly)

Nonres: +10-15% (led by energy & power,hospitals, lodging)

• Materials costs: +3-5% Dec.-Dec.

• Labor costs: +4.5-5.5% Dec.-Dec.

Summary for 2008

• Total construction spending: +1-5%

Res: +1-3% (turnaround after mid-2008)

Nonres: +3-7% (led by energy & power,hospitals; weaker highways, lodging)

• Materials costs: +6-8%

• Labor costs: +5-6%

AGC Economic Resources (sign up by email to simonsonk@agc.org)

• The Data DIGest: weekly one-page email

• PPI tables: emailed monthly

• Construction Inflation Alert: Oct. & March

• Audioconferences: Dec. & June

• State-specific emails (timing varies) and

fact sheets: www.agc.org /factsheets

Ken SimonsonChief Economist

Associated General Contractors of Americasimonsonk@agc.org, 703-837-5313