Construction Barometer™ > Most Recent Readings - 1st Quarter 2010
Impact of Federal Stimulus Meets Threat of Rising Materials Costs (Up 1.0%)
For the first three months of 2010, the Carolinas AGC Construction Barometer advanced 1.0% on rising highway and utility spending, a small uptick in construction hiring, and the typical surge in business activity associated with the end of the winter season.
Limiting the Barometer's gain: contractors continue to struggle with weak market demand for new projects, and they foresee rising construction costs. In addition, ultra-low interest rates continue to offer minimal benefit to contractors unable to secure funding for both short- and long-term borrowing.
The Barometer's quantitative indicators showed significantly stronger improvement than its qualitative measures (which capture contractor sentiment regarding business conditions). On the quantitative side, the Employment & Labor Market indicator advanced 5.9% on significantly higher hiring volume in all Barometer regions except in Heartland NC. This uptick, along with stable labor costs and a plentiful labor supply, explains the sharp increase in labor market conditions. Contractor perceptions of labor market trends, however, declined 3.1% on panelist expectations that labor market conditions will tighten later in the mid-2010, with a slight reduction in the availability of skilled labor and a general increase in labor costs. For the moment, however, most Carolinas contractors remain open to a moderate increase in hiring while labor is plentiful and costs are quite reasonable.
Across the Barometer's Business & Economic trends segment, quantitative markers advanced 5% on reports of stronger construction activity, stable material and equipment costs, and rising highway and the arrival of federal stimulus money.
Unfortunately, contractors reported rising expectations that federal stimulus project money would affect overall business volume for only a few quarters in 2010, vanishing after the summer unless more government money is directed toward highway and public works projects. Consistent with this expectation, demand for new skilled labor is expected to fall in summer; demand for heavy equipment is expected to fall; and business conditions for the rest of 2010 are likely to slow somewhat from the pace of early spring.
Another troubling trend: panelists reported significantly higher probabilities that construction costs will rise this summer, across all projected construction cost data categories. Contractors beware-- material, labor, and heavy equipment costs all showed signs of rising, placing still more stress on contractor profit margins and business risks.
Finally, financial market conditions facing commercial contractors remain quiet. Interest rates continue at rock-bottom levels, but both demand and supply remain weak. Panelists reported that while bankers were a bit more receptive to contractor borrowing requests in first quarter, the difference in lender attitudes was so small to be almost imperceptible. As a consequence, contractor borrowing remains well below historical average, and financial market activity remained muted.
State vs. State:
Business Improves Modestly in NC; Hiring is Up Significantly in SC
NC - Up 0.7%; SC - Up 1.6%
The Barometer advanced at a significantly stronger pace in South Carolina, where the impact of federal stimulus money appeared to be much stronger than in North Carolina. SC contractors reported improved highway spending and stronger public works activity, but neither trend is expected to last much further into the year. Thus, looking out toward the remainder of 2010, SC contractors reported lower hiring expectations mid-summer. SC contractors reported lower interest rates on contractor borrowing, slightly easier credit conditions, and a bit higher volume of loan approvals for the quarter.
Business conditions in North Carolina look somewhat different. Panelists reported slightly stronger private activity, a smaller uptick in highway spending fueled by federal stimulus money, and no real change in hiring plans. The upward movement in private construction in North Carolina is expected to be sustained for remaining 2010, resulting in a slight tightening in the supply of available skilled labor. Consistent with this trend, construction wages are expected to advance in the second and third quarters of 2010.
Regional Economic Highlights
Heartland NC: Hiring Down, but Business Up a Bit
Down 1.4%
The Heartland North Carolina region experienced a slight drop in the overall Barometer score on falling labor demand, decreased hiring plans for summer, and declining financing activity. The downward trend was buffered somewhat by rising construction activity early in the year, rising expectations that business conditions would continue to strengthen, and stable construction equipment and materials costs. The absence of materials cost inflation in the Heartland is expected to be short lived, with most panelists projecting increasing costs by mid-summer.
Improved business activity in the region during first quarter was almost entirely driven by private work. All of the public infrastructure variables contained in the Barometer's scoring system, including highway and utility spending, public works spending, and DOT spending, were unchanged from late 2009. The impact of federal stimulus money observed in other regions didn't impact the Heartland with sufficient magnitude. In contrast with other regions, Heartland panelists reported a slight drop in financing approvals, and modestly higher interest rates for new contractor borrowing requests. Given these credit market changes, the demand for new loan activity was down.
Eastern NC: Largest Jump Among All 5 Regions
Up 8.3%
Federal stimulus money lit a fire under the commercial construction industry in Eastern NC, pushing the region's score up by 8.3% on rising business activity, increased hiring, and rising highway and utility spending. The jump represents the largest percentage change across the 5 Carolinas regions in first quarter. Sadly, contractors expected the improved construction climate to be short-lived. Panelists projected deteriorating conditions over the last half of 2010, and have adjusted future hiring plans downward to reflect a slowing economy based on reduced federal stimulus spending.
Western NC: Temporary Uptick in Hiring
Down 1.1%
Western NC experienced increased construction activity due to rising highway spending, attributable to federal stimulus money. However, panelists reported that falling private sector spending offset gains from the stimulus. The decline in private construction work is expected to turn around toward the end of the year though, leaving Western contractors expecting a slightly stronger year ahead. Hiring activity in the West was also up sharply for the quarter, although job gains weren't nearly as substantial as in the East.
Upstate SC & Lowcountry SC: Business Up, Business Down
USC - Up 4.4%; LSC - Down 4.8%
For first quarter 2010, Upstate SC contractors reported a modest improvement in business conditions, while Lowcountry contractors reported deteriorating conditions. In both regions, panelists reported stronger hiring plans for the second quarter, although the trend was significantly stronger in the Upstate. In the Lowcountry, while contractors added a few workers in the spring, the uptick in hiring was expected to be short-lived. Upstate contractors reported an opposing trend: increased hiring activity correlated positively with an uptick in reported business activity, which resulted in Upstate panelists expecting sales gains in second quarter to continue throughout 2010.
In the Upstate, contractors noted significant gains in highway and public works spending associated with the inflow of federal stimulus spending, but a similar trend was completely absent from the Lowcountry. Upstate contractors expect the jump in highway and utility spending to vanish before the end of 2010, returning public works spending to more normal levels. Credit market conditions also differed across South Carolina as well, with Upstate contractors reporting markedly easier credit conditions and a slight reduction in both short- and long-term borrowing rates. In the Lowcountry where local lenders indicated a willingness to lend, the cost of credit is significantly lower than reported at year-end 2009.
To participate as a Construction Barometer panelist contact Lori Tharp at 704/372-1450 ext. 5227 or ltharp@carolinasagc.org.
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