Construction Barometer™ > Most Current Results - 1st Quarter 2008
(Based on 1st Quarter 2008)
WHAT GOES UP --ALSO COMES DOWN
(Down 2.2%)
The Carolinas AGC Construction Barometerä posted a 2.2% drop in the first quarter of 2008. In the 10-year history of the CAGC Barometer, we’ve never experienced a quarter when every statistical indicator turns downward at the same time— the good news is, that record remains unbroken. But whew-- it was a really close call!
Nearly every Barometer statistic, with only a few minor exceptions, dropped, causing the index to post its worst showing ever at 2.36. Worse yet, it’s quite likely that we will break the all-time low record set in March 2000 sometime before the end of 2008.
It’s a tough market out there.
Clearly, the long-anticipated downturn in construction has arrived in the Carolinas, and from the looks of the Barometer’s quarterly numbers, the bad times may be with us for awhile.
Similar to recent results reported in the Conference Board’s Survey of Consumer Confidence, the Barometer’s decline was widespread and pervasive throughout the Carolinas. Every category– the Employment and Labor series, the Business and Economic Trends segment, and the Financing Availability section– posted a drop for first quarter. In keeping with current expectations regarding industry activity, the downturn was more severe in the less-populated regions of the Carolinas, including the Eastern and Western NC regions and SC’s Lowcountry area. It was less substantial in the urban corridors of the states, represented by Heartland NC and Upstate SC.
In most cases, deteriorating business volume, increasing concern about future activity, and growing contractor pessimism about the state of the economy led the list of negative statistical indicators driving the Barometer downward. The Business and Economic Trends segment dropped a whopping 11% on the qualitative side, and 3.3% on the quantitative side. Adding insult to injury, contractors reported rapidly rising overall construction and equipment costs in combination with slowing business activity. The source of materials cost increases was frequently, but not always, rising oil prices.
The next several months are likely to bring virtually no improvement in business conditions or petroleum prices within the industry. Contractors expect additional materials cost increases throughout the remaining months of 2008, additional slowing in overall business activity, and reduced expenditures for fixed assets and other business equipment.
The single Barometer bright spot occurred in the construction labor market. Rapidly falling demand for labor, in combination with an inflow of new workers from other regions of the US led to continuing worker migration into the regional. As a result, contractors report virtually no difficulty in hiring whatever skill set required, and wages dropped a bit as an excess of stressed workers competed to find jobs within the industry. Given the current forecast for slowing business activity, it’s not surprising that contractors expect the excess supply of workers to remain throughout 2009, along with falling industry wages.
Meanwhile, down at the bank, things are even worse for commercial bankers than they are for contractors. Even in the Carolinas, where residential real estate values are holding reasonably firm in spite of a 15.3% nationwide drop in home prices, contractors report that bankers are growing increasingly cautious in approving new business loans. The one bright spot on the commercial financing landscape is the level of borrowing costs in most areas of the Carolinas, which have remained stable throughout the region for the first several months of 2008. Once again, this trend is expected to continue well into 2009, although contractors in some regions report that lenders are requiring greater compensation for default risk in extending new loans to contractors.
Surprisingly, stress in the public sector related to falling tax revenues-- attributable to a slowing regional economy and a significantly reduced demand for gasoline-- is not yet showing up in the Barometer’s highway and utility spending indicators. For the moment, federal and state spending on the Carolinas highway infrastructure remains constant, but is expected to deteriorate in 2009 as tax revenues associated with gasoline sales plummet with falling demand for gas. At the same time, contractors report rapidly escalating asphalt and other highway construction materials costs, once again related to the rising cost of petroleum. These 2 trends combined signal that we could be on the verge of a crisis in road building activity in 2009 and 2010. At the very least, state and federal authorities will be forced to raise transportation-related taxes to gain sufficient revenue to accommodate the currently-planned level of highway maintenance activity.
State vs. State: Not Much Difference (NC - Down 2.3%; SC - Down 2.1% )
Construction slowed in North Carolina by 2.3% and in South Carolina by 2.1% from 2007 year end. In both cases the principal cause was a significant slowing of commercial construction activity in early 2008, rising materials and equipment costs facing contractors, and increasing contractor pessimism about expected business conditions in 2009. These particular trends were somewhat more evident in NC, with SC contractors reporting a bit more optimism. There was also a difference in labor conditions, with SC contractors expressing a stronger belief that labor will tighten in 2009, as opposed to NC contractors expecting good conditions to continue.
Regional Economic Highlights
Heartland NC: Significantly Slower Activity
(Down 2.1%)
In Heartland North Carolina, the only substantial differences from the other Carolinas regions in first quarter was a sharper drop in construction activity, and yet a stronger expectation that construction volume will stabilize in 2009. In other regions, this pattern was reversed.
Eastern NC and Western NC: Labor Costs Up in the West; Down in the East
(ENC - Down 3.1%; WNC - Down 2.2%)
Both the Eastern and Western regions of North Carolina experienced falling Barometer scores in the first quarter, but the drop in business activity was much stronger in the West than East. On the Qualitative side, business activity fell 11% for contractors in the western area, but a much smaller 2.5% in the East, a trend commonly observed across the 2 regions during winter months. Both regions reported similar materials and equipment cost increases, and rising expectations that business growth will slow in the coming year.
Labor market trends diverged markedly across the 2 regions. In the East, contractors reported easier hiring conditions, falling wage rates, and the belief that good labor market conditions will continue will into 2009. In the West, while contractors reported much the same, paradoxically they reported rising wage rates in the skilled building trades. Financing conditions deteriorated modestly in both regions on falling loan approvals and continued tightening of commercial lending standards.
Upstate and Lowcountry SC: Business Ok in Upstate, So-So in Lowcountry
(USC - Down 1.6%; LSC - Down 3.2%)
Labor market differences characterize the 2 South Carolina regions. In the Upstate, contractors anticipate a modestly growing number of construction jobs on slightly stronger quarterly business activity. In contrast with this mild optimism in a difficult economic environment, Lowcountry contractors report no planned job growth in the industry, falling business volume, and expectations that 2009 will bring weaker commercial construction activity. At the same time, however, Lowcountry contractors report that the anticipated fall-off in 2009 construction activity will be less severe than they originally anticipated.
In the Upstate, business activity rose in the first quarter, but not expected to continue throughout 2008 and into 2009. The uptick in regional hiring is a temporary condition as well. Financing in both South Carolina regions weakened for the first quarter on rising commercial borrowing costs, as bankers required increased compensation for risk in extending new loans to South Carolina contractors.
For a more detailed members-only look at the Carolinas AGC Construction Barometer™ results for Quarter 1, 2008 visit www.cagc.org, and click Construction Market Stats.
To participate as a Construction Barometer panelist, contact Lori Tharp at 704/372-1450 ext. 5227 or ltharp@carolinasagc.org.
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