Construction Vital to Economic Recovery
 Construction activity, more than existing home sales reported today by the Wall Street Journal, gives an outlook of what to expect from the economy. This is particularly true for states like Arizona, at the troublesome leading edge of job loss due to construction declines.
Existing home sales increased 2.4 percent in May, showing the first back-to-back improvement in this indicator since 2005, according to Bloomberg.
But the actual improvement was less that the 3 percent boost predicted by the Bloomberg Survey of 74 economic forecasts, and also still represents a 3.6 percent decline in sales activity compared to one year ago.
But, the reality is that this increased activity is no big cause for celebration over the economy because:
-May is usually among the top three home sales months of the year (Bloomberg)
-Still-escalating job loss is producing more foreclosures and short sales, factors in one third of May existing home sales (Wall Street Journal)
-First-time home buyers have been motivated by low interest rates and special tax consideration under the stimulus package, but now interest rates are edging up again (both news sources).
With housing prices still falling, this sales activity does more to support how problems in the housing market still have not been reined in, partly due to soaring unemployment.
Arizona Economists: Ownership Lure Recycles Problems
Last month, AnalysisOnline cited research from Marshall Vest, director of the Economic and Business Research Center at the University of Arizona who noted a perfect convergence of factors capable of luring too many people into home ownership who are not financially prepared for it over the long haul – thus creating the same problems as fostered the current housing collapse (see AOH, “Upbeat Home Sales: Frosting on the Cake?”)
Those factors include an $8,000 tax credit for first-time buyers offered by the Obama Administration and the housing see-saw that brings housing prices further down as foreclosures go higher up.
What the economy needs to see is strong improvement in the construction sector – residential construction, absolutely because its declines have been steep, but also commercial construction, because it contributes to economic growth more substantially than the shuffle of lost homes pushing existing home sales.
U.S. Census Bureau Reports
The U.S. Census Bureau reports on new home sales (single-family), housing starts, building permits and manufacturers’ orders as leading economic indicators – meaning when those indicators start improving consistently, better days are likely ahead.
Increases in new home sales and building permits indicate that a boost in durable goods – such as appliances – is ahead too and the boost continues to ripple through the economy.
The residential housing market gets much of the popular media’s attention because readers relate strongly to the residential market.
But, based on the U.S. Census Bureau’s April report on construction activity, residential construction was about one quarter of total construction; nonresidential construction is around 74 percent of the total. (Residential construction has declined much more sharply than nonresidential construction over the last year.)
In April 2009, total construction was down 10.7 percent from a year earlier. Residential construction was down almost 35 percent. (These are seasonally adjusted annual rates for construction put in place.) “Construction put in place” differs from building permit and construction contract data in timing and coverage; it includes installed cost of normal building service equipment and selected types of industrial production equipment, according to the Census Bureau.
Outlook for Nonresidential Construction is Weak
A June 17 slide presentation by Ken Simonson, Associated Feneral Contractors of America Chief Economist, forecasts some improvement in residential construction in late 2009. The bulk of the improvement is expected to be in the single-family housing market early on, with multifamily construction not picking up until 2011, he says.
But nonresidential construction in 2009 is expected to fall 3 to 9 percent. And while there is something of a respite in the cost of building materials currently, beyond 2009, materials prices are expected to climb by 6 to 8 percent, with intermittent spikes.
Simonson notes that some of the chief economic influences leading to this forecast are: rising vacancies for office, retail and hotel space; falling state and local spending; and no substantial job growth as unemployment continues to climb.
Arizona Leads Construction Sector Job Loss
Job loss in the construction sector is a dominant factor in Arizona’s economic slowdown. In fact, Arizona has suffered more construction-related job loss than any other state. A recent report by the Associated General Contractors of America (AGC) shows that construction-related jobs were down 28 percent in Arizona in May compared to a year ago.
Construction-related employment in May rose in 18 states and fell in 31, plus the District of Columbia.
These mixed results occurred despite the $787 billion economic stimulus package that included an estimated $135 billion for construction (see Simonson slide presentation). Many states have been scrambling to plug severe budget deficits, in some cases using stimulus funds for that purpose, where possible.
Impact of Construction Activity on General Economy
Significant loss of jobs and overall slowdown in the construction sector pose a serious detriment to a state’s general economy due to the high impact construction activity has on the economy – in direct jobs, support industries and firms and induced spending by employees in construction and support industries.
Stephen Fuller of George Mason University presented AGC economic analysis on the impact of construction activity in testimony to the House Committee on Transportation and Infrastructure. He said:
“In a nutshell, my research found that, when there are sufficient unused labor, capital and
materials, an additional $1 billion of investment in nonresidential construction supports or
creates 28,500 jobs and adds $3.4 billion to GDP and $1.1 billion to personal income. Only about one-third of the benefit accrues directly to the construction industry. Roughly one-sixth goes to industries that supply materials, services and equipment to the construction project. Fully half of the gain is diffused through the entire economy, as workers and owners in the construction and supplier industries spend their added income on a wide range of goods and services.”
The AGC, through methodology Fuller explains in his testimony, also arrived at state-by-state impacts of increased nonresidential construction activity on the economy. Click here for an interactive map of all states. (Updated research data is available on the AGC web site for the cost of a report.)
U.S. and Arizona Impact
According to the analysis, with existing slack conditions and availability of labor, capital and materials that exists in the nonresidential construction industry currently, each additional $1 billion in spending would produce the following for the United States overall and Arizona, in specific.
In the U.S. – An additional $1 billion in Nonresidential Construction Spending Would Provide
-28,500 jobs created or sustained
-$3.4 billion added to Gross Domestic Product
-$1.1 billion added to personal income
In Arizona – An additional $1 billion in Nonresidential Construction Spending Would Provide
-21,000 jobs created or sustained
-$2.3 billion added to state Gross Domestic Product
-$740 million added to personal income
Resource Note for Reporters
Reporters looking for examples of construction activity in Arizona can find a good resource on the web page of Reed Construction Data-Arizona Project Leads, which provides a sample of projects from their database in various phases (planning/bid/post-bid). |
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