Construction & Materials Outlook

AGC Oregon-Columbia ChapterWilsonville, OR, October 29, 2008Ken Simonson, Chief Economist

AGC of Americasimonsonk@agc.org

2

Current economic influences

• Credit market freeze affecting private, state and local borrowers

• Weak economic outlook, falling state spending

• No job growth, rising unemployment• Wages, personal income < CPI change

Source: Author, from BEA (GDP, personal income), BLS (CPI, employment, unemployment)

3

The shifting construction market(total change August 2007 – August 2008: -6%)

-28% i+13% i

+8% i

0

100

200

300

400

500

600

PrivateResidential

PrivateNonresidential

Public$ B

illio

ns

(S

ea

s. A

dj.

An

nu

al R

ate

)

Aug. 2007

Aug. 2008

Source: Census (construction spending)

4

Single-family (SF) vs. multifamily (MF)• August construction spending (value put in

place):• SF: -4.2% vs. July, -41% vs. 8/07• MF: -4.2% vs. July, -4.3% vs. 8/07• Improvements: +9.8% vs. July, -8.4% vs. 8/07

• September building permits:• SF: -3.8% vs. August, -38.9% vs. 9/07• MF: -16.4% vs. August, -37.6% vs. 9/07

• September housing starts:• SF: -12.0% vs. August, -41.9% vs. 9/07• MF: +7.5% vs. August, +9.6% vs. 9/07

Source: Census

5

Housing outlook

• SF: No relief yet for decline in permits, starts or spending, but sales could pick up by early ‘09

• Starts won’t improve until mid ‘09 at best• MF: Rental construction cushioned the fall

in condo starts but now many owners are trying to rent out houses and condos

• Foreclosures will add to inventories, drag down both sales and rentals

Source: Author

6

Nonres ’07 totals, change; ’08 YTD change

’07 Total Share Change ’08 YTDNonresidential total $638 billion 100% +16% +13%Educational 96 15 +13 + 9Commercial 88 13 +16 + 2Highway & street 76 11 + 6 + 4Office 65 11 +19 +15Power 53 10 +34 +34Healthcare 43 6 +11 + 8Manufacturing 43 8 +20 +49Transportation 32 5 +16 +13Lodging 29 5 +58 +37Communication 27 4 +22 0Sewage & waste disposal

25 4 + 6 + 4

Other (amusement; water; safety; relig.; conservation): 9% of total

Source: Census

7

Leading segments in 2008 - 20092007 2008 Forecast

Segment Bil. $

Change

YTD 2008 2009

Power 53 +34%

+34%

+25 to +35%

i

Energy 17 +55 +23 +20 to +30

i

Hospitals 31 +14 + 4 +5 to +10 iHigher ed. 30 +13 +17 +10 to

+15i

BRAC and Homeland Security (part of several segments)

Source: Author

8

Weaker segments in 2008 - 2009

Source: Author

2007 2008 Forecast

Segment Bil. $

Change

YTD 2008 2009

Lodging 29 +58%

+37%

+25-30%

i

Office 65 +19 +15 +5 to 10

i

Commercial 88 +16 + 2

- 2 to +1

i

Primary/ Secondary

59 +15 + 7+3 to

+6 i

Highway 76 + 6 + 4 +1 to +3

0

9

Spending outlook for 2008 - 2009

Source: Census; Author

Actual Forecast

2007 2008 2009

Residential -19% -25 to -30% -2 to +2%

Nonresidential

+16% +6 to +11% -3 to -9%

Total -2.6% -6 to -10% -1 to -7%

But…materials, labor costs may still rise

10

Materials and components

• Higher increases for construction inputs than for overall economy:

12 mo. to: 12/04 12/05 12/06 12/07 9/08

Const PPI 9.1% 8.2% 4.6% 4.5% 13.1%

CPI-U 3.3% 3.4% 2.5% 4.1% 4.9%

• Cumulative change double the CPI since 12/03:

Const PPI 45%

CPI-U 19%

• Producer price index drivers: steel, gypsum, diesel, asphalt, concrete, copper, plastics, aluminum, wood

Source: BLS (CPI, PPI)

Change in Producer Prices for Construction vs. Consumer Prices, 2003 - 2008 (December 2003 = 100)

100

105

110

115

120

125

130

135

140

145

12/03 12/04 12/05 12/06 12/07

PPI for inputs to construction industries: 45%

Consumer price index: 19%

Source: BLS (CPI, PPI)

Sep. 2008

Change in Producer Prices for Construction Segments, 2003 - 2008 (December 2003 = 100)

100

110

120

130

140

150

160

170

180

12/03 12/04 12/05 12/06 12/07

Highway and street construction: 76%

Other heavy construction: 60%

Nonresidential buildings: 43%

Single-unit residential: 33%

Consumer price index: 19%

Source: BLS (CPI, PPI)

Sep. 2008

Change in Producer Prices for Major Construction Inputs, 2003 - 2008 (December 2003 = 100)

100

150

200

250

300

350

400

450

12/03 12/04 12/05 12/06 12/07

#2 diesel fuel: 249%

Copper and brass mill shapes: 143%

Steel mill products: 122%

Concrete products: 38%

Gypsum products: 22%

Consumer price index: 19%

Source: BLS (CPI, PPI)

Sep. 2008

Producer Price Indexes, 2007 vs. 2008

14

No. 2 Diesel FuelChange from 9/07-9/08: 39%

Steel Mill ProductsChange from 9/07-9/08: 38%

Asphalt Paving Mixtures & BlocksChange from 9/07-9/08: 51%

150

250

350

450

Jan Mar May Jul Sep Nov

2007

2008

150

200

250

300

Jan Mar May Jul Sep Nov

2007

2008

200

250

300

350

Jan Mar May Jul Sep Nov

2007

2008

Producer Price Indexes, 2007 vs. 2008

15

Gypsum ProductsChange from 9/07-9/08: 1.7%

Lumber and PlywoodChange from 9/07-9/08: -3.4%

Concrete ProductsChange from 9/07-9/08: 4.3%

Copper & Brass Mill ShapesChange from 9/07-9/08: -2.9%

150

200

250

300

Jan Mar May Jul Sep Nov

2007

2008

150

165

180

195

Jan Mar May Jul Sep Nov

2007

2008

350

400

450

500

Jan Mar May Jul Sep Nov

2007

2008

175

200

225

250

Jan Mar May Jul Sep Nov

2007

2008

16

Outlook for materials in ‘09 compared to ‘08• Lower average prices: diesel, asphalt,

steel• Possible increases: concrete, gypsum,

copper, wood products• Year-over-year PPI change: 2-5%

Source: Author’s forecasts

17

Outlook for materials (beyond 2009)

• Industry depends on specific materials that:• are in demand worldwide• have erratic supply growth• are heavy, bulky or hard to transport

• Construction requires physical delivery• Thus, industry is subject to price spurts,

transport bottlenecks, fuel price swings• Expect 6-8% PPI increases, higher spikes

Source: Author’s forecast

18

Construction jobs fall, but wages rise

-6.1%-0.7%

-6%

-4%

-2%

0%

2%

4%

6%

Total Private Construction

Ch

ang

e 9/

07 -

9/0

8

Employment Average Hourly Earnings

3.4%4.5%

-6%

-4%

-2%

0%

2%

4%

6%

Total Private Construction

Ch

ang

e 9/

07 -

9/0

8

Source: BLS

19

Change in construction employment, Aug. 07 – Aug. 08

11%11%

-28%

-11%

-2%

70

85

100

115

130

Aug-07 Aug-08

Nonres employment (BLS est.) Nonres spending

Res employment (BLS est.) Adjusted nonres employment

Residential spending

-2%

-11%

70

85

100

115

130

Aug-07 Aug-08

BLS Employment Change Adjusted Employment Change

Source: Author (from BLS, Census data)

20

Implications for 2008-09 wages

• Nonres employment actually includes another 523,000 ‘res’ specialty trades

• Thus, res change 8/07-8/08 was -28%, not -11%; nonres change was +11%, not -2%

• Biggest demand in ’08 will be for crane operators, other scarce skills

• Wages in ‘08 will rise +5 to +6% vs. +4.1% in ’07

• Nonres slump in ’09 will slow wages to +3-4.5%

Source: Author’s forecasts

21

State construction employment, 9/07 – 9/08

(U.S. total: -6.1%)

-17.2%

-13.7%

-13.5%

-12.4%

-10.6%

-20% -15% -10% -5% 0%

Ariz.

S.C.

Utah

Fla.

Ore.

1.3%

1.5%

2.3%

3.2%

4.5%

0% 1% 2% 3% 4% 5%

S.D.

Wyo.

D.C.

Texas

Okla.

5 Biggest Losses 5 Biggest Gains

Source: BLS

22

SD

NDMT

ID

NV

CA

OR

WA

UT

WY

NE

CO

OK

TXLA

FL

MN

IA

IL

ME

AZNM

KS

WI

OH

MINY

VT

IN

MO

AR

KY

TN

NH

PA

RI

MS AL

SC

NC

GA

VAWV

MA

CT

AK

HI

NJ

DE

MD

DC

State construction employment, 9/07 – 9/08

2.0% to 4.5%

-0.1% to -2.0%

0.0% to 1.9%

-2.1% to -17.2%

AK

23

Summary for 2008

• Nonres spending: +6 to +11% (led by energy, power, communications, hospitals, higher ed; weaker highway, retail, office, lodging)

• Res: -25 to -30% (no turnaround before ‘09)

• Total construction spending: -6 to -10%

• Materials costs: +6 to +8%

• Labor costs: +5 to +6%

24

Summary for 2009

• Nonres spending: -3 to -9%

• Res: -2 to +2% (SF up in 2d half, MF down all year)

• Total construction spending: -1% to -7%

• Materials costs: +2 to +5%

• Labor costs: +3 to +4.5%

25

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

• State-specific emails (timing varies) and fact sheets: www.agc.org /factsheets

• Webinars/Audioconferences

Ken SimonsonChief Economist

Associated General Contractors of America

simonsonk@agc.org, 703-837-5313www.agc.org