Producer Price Index drops from year ago; Reed Construction Data, CEA, Fed differ on activity levels
By Ken Simonson
The Bureau of Labor Statistics reports the producer price index (PPI) for inputs to construction industries climbed 1.1 percent for August but fell 7.4 percent from August 2008. Three items accounted for much of the up-and-down movement: the PPI for diesel fuel jumped 17 percent for the month but fell 41 percent over 12 months; steel mill products, 6.8 percent and -36 percent; and copper and brass mill shapes, 11 percent and -14 percent. PPIs for finished nonresidential buildings, which are intended to capture contractors’ labor, overhead and profits as well as materials costs, rose for warehouses, 0.1 percent for the month and 1.4 percent over 12 months; offices, 0.2 percent and 2.9 percent; schools, -0.5 percent and 7.3 percent; and industrial buildings, -0.2 percent and 0.1 percent.
Indexes are based on contractors’ estimates for hypothetical projects, not actual competitive bids, and may not reflect the deep discounting that contractors and owners alike report is occurring on projects.
The value of new nonresidential construction contracts jumped 13 percent in August but was down 13 percent for the first eight months of 2009, compared to the same period in 2008, Reed Construction Data reported on Thursday, based on its own data compilation. The largest gains in August were for the “stimulus-targeted markets”—bridges, dams and marine, water/sewage and highways—plus miscellaneous commercial and amusement, Chief Economist Jim Haughey reported. “The starts report does not yet clearly show the stimulus impact on building markets although education, library/museum and government offices all posted…gains in August….Both manufacturing and miscellaneous civil starts remained very high in August due to energy-related projects including power generation and distribution, oil and gas field facilities and refinery retrofitting to produce cleaner fuels.”
The President’s Council of Economic Advisers (CEA) reported on Sept. 10, “As of the end of August, $151.4 billion of the original $787 billion [American Reinvestment and Recovery Act (ARRA)] has been outlaid or has gone to American taxpayers and businesses in the form of tax reductions….This analysis indicates that the ARRA and other policy actions caused employment in August to be slightly more than 1 million jobs higher than it otherwise would have been. We estimate that the Act has had particularly strong effects in manufacturing, construction, retail trade and temporary employment services.”
The report estimates $16.5 billion has been spent through August on “government investment outlays...spending on infrastructure, health information technology, research on renewable energy and other forms of direct spending excluding transfers. Also included here are tax credits for particular types of private spending, such as weatherization or research and experimentation, since these credits are functionally similar to the direct government spending….the construction industry, where job losses have moderated substantially despite the fact that the recession has in many ways been centered in residential real estate, could suggest a role for the Recovery Act spending in infrastructure and the First-Time Homebuyer Tax Credit. Some of the moderation of job losses in this sector presumably also reflects other policy actions, such as the Administration’s programs to help distressed homeowners and the Federal Reserve’s efforts to support the mortgage market.”
The report also estimates each sector’s “cyclicality” or response to change in total employment. “The cyclicality factors indicate that construction and information are the most procyclical major sectors. Construction employment rises 1.76 percent for a 1 percent gain in total employment. As a result of cyclicality along with the “rising tide” effect of stimulus helping all industries proportionally, the report estimates construction has added 133,000 jobs or 13 percent of the 1,040,000 total employment gains from ARRA. The fact that the recession has been unusually concentrated in construction may mean that the fraction of jobs saved or created by fiscal stimulus in this recession that are in construction is different than it usually would be.”
The Beige Book was a bit more upbeat about homebuilding but not about conditions in nonresidential construction and real estate. Residential “construction remained at low levels overall, although Chicago and Dallas reported a small increase in activity. Reports on commercial real estate markets indicated that demand for space remained weak and that construction continued to decline in all Districts. Atlanta, Philadelphia, Richmond and San Francisco reported that vacancy rates increased, while rates held steady in the Boston and Kansas City Districts and were mixed in New York. Boston, Dallas, Kansas City, Philadelphia and Richmond commented that the demand for space remained weak. Commercial rents declined according to Boston, Chicago, New York, Philadelphia and Richmond. Rent concessions were reported in the Richmond and San Francisco markets and Richmond noted that some landlords had postponed property improvements in an effort to conserve cash. Construction remained at very low levels, with modest improvements noted in public construction in the Chicago, Cleveland and Minneapolis Districts.”
Edited by Kevin Doyle
The Data DIGest is a weekly summary of economic news compiled by Ken Simonson, the Chief Economist of The Associated General Contractors of America (AGC).