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AGC's Data DIGest: July 21-25, 2014

MHC, AIA, NABE surveys imply improving construction market; retailers think small

Editor’s note:  Construction Citizen is proud to partner with AGC America to bring you AGC Chief Economist Ken Simonson's Data DIGest. Check back each week to get Ken's expert analysis of what's happening in our industry.

New construction starts in June advanced 6%” at a seasonally adjusted annual rate to the highest level so far in 2014, McGraw Hill Construction (MHC) reported last Tuesday. “Nonresidential building strengthened [+12%] after pulling back in May, with the lift coming from the start of several large manufacturing plant projects. Modest gains in June were also reported for housing [+3%] and nonbuilding construction (public works and electric utilities) [+2%]. During the first six months of 2014, total construction starts on an unadjusted basis were…up 1% from the same period a year ago….During the first two months of 2014 [activity was sluggish], but then the pace of construction starts began to pick up…‘The first half of 2014 revealed a mixed performance by project type,’ stated Robert A. Murray, chief economist for [MHC]. ‘Single-family housing stands out as the biggest surprise on the negative side, as its upward trend present for much of 2012 and 2013 has stalled for now. Public works and electric utilities are seeing generally decreased activity, as expected. On the positive side, multifamily housing is still proceeding at a healthy clip, and commercial building continues to move hesitantly upward, with office construction this year providing most of the support. Manufacturing-related construction surged in the first half of 2014, boosted by the start of several massive chemical plants and refineries, while the institutional building sector is still trying to make the transition from lengthy decline to modest growth. The year-to-date increase for total construction starts, at a slight 1%, reflects the lackluster activity present in January and February. More recent statistics suggest that the expansion for total construction is getting back on track in a moderate, if selective, manner.” Compared with the first six months of 2013, starts in the first half of 2014 rose 9% for nonresidential building and 4% for residential but fell 14% for nonbuilding.

The American Institute of Architects (AIA) reported last Wednesday that its Architecture Billings Index (ABI), which “reflects the approximate nine- to 12-month lead time between architecture billings and construction spending,” climbed to 53.5 in June, seasonally adjusted, from 52.6 in May. “The diffusion indexes contained in the full report are derived from a monthly…survey that is sent to a panel of AIA member-owned firms. Participants are asked whether their billings increased, decreased or stayed the same in the month that just ended, as compared to the prior month, and the results are then compiled into the ABI. These monthly results are also seasonally adjusted to allow for comparison to prior months.” Scores above 50 indicate an aggregate increase in billings, and scores below 50 indicate a decline. “By sector, residential firms continue to report strong growth [57.7 in June, based on a three-month average], while commercial/industrial firms have now seen six straight monthly gains [53.1 in June]. Institutional firms saw the first monthly increase in billings [50.2] since last summer.”

Sales, employment and capital spending all increased at more firms in the second quarter of 2014 than in the first quarter, according to the 85 corporate economists who responded between June 23 and 30 to the Business Conditions Survey (an expanded version of the former Industry Survey) that the National Association for Business Economics (NABE) released last Monday. Of the 62 respondents who reported on capital spending on structures at their firms last quarter, 29% reported an increase and 8% a decrease. Of the 60 who reported on expected structures investment in the third quarter, 27% stated they expect an increase, 13% a decrease.

Big-box retailers are trying smaller formats, putting downward pressure on retail construction. Target “keeps trying to wedge its offerings into smaller and smaller stores,” Marketplace Radio reported last Wednesday. “The company has already made a play for urban customers with its scaled down CityTarget stores. But even those will be five times as big as the new TargetExpress store that opened last Wednesday, in a Minneapolis neighborhood called Dinkytown….Target says it plans to open four more TargetExpress stores next year.” The Wall Street Journal reported on July 10, “This year, for the first time in history, Wal-Mart will open more smaller grocery and convenience-type stores than supercenters. At 10,000 to 40,000 square feet, its Wal-Mart Express and Neighborhood Market concepts are a fraction of the size of a 200,000-square-foot superstore.”

“Current construction costs rose for the 30th consecutive month in July,” IHS and the Procurement Executives Group (PEG) reported last Wednesday. “The headline current IHS PEG Engineering and Construction Cost Index [registered 55.9, relative to a neutral reading of 50] in July, softer than the June reading, but still comfortably in positive territory. This month, gains from steel-related products kept the index in positive territory; however, this should be viewed as a temporary cost pressure. Cost pressure in other material and equipment categories remain fairly modest and, in our view, price increases for fabricated structural steel will either be light or non-existent for the rest of 2014 in the United States. [The index] is based on data independently obtained and compiled by IHS from the procurement executives of leading engineering, procurement and construction firms. The headline index tracks industry-specific trends and variations, identifying market-turning points for key projects, and is intended to act as a leading indicator for wage and material inflation specific to this industry.”

The Data DIGest is a weekly summary of economic news; items most relevant to construction are in italics. All rights reserved. Sign up at www.agc.org/datadigest.

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