GDP, Beige Book, McGraw-Hill reports point to strong economy, construction sector
July 29

July 29, 2005
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Real (net of inflation) gross domestic product-the output of all goods and services produced by labor and property located in the U.S.-increased at a 3.4% seasonally adjusted annual rate in the second quarter, the Bureau of Economic Analysis (BEA) announced today. That compares with a 3.8% growth rate in the first quarter and 3.3% (revised from a previous estimate of 3.8%) in the fourth quarter of 2004. The growth rate for real investment in private nonresidential structures swung to +3.1% in the second quarter from -2% (previously -2.4%) in the first quarter and +4.7% (previously +2.1%) in the fourth quarter of 2004. (BEA, unlike the Census Bureau, defines structures to include mines and wells.) Investment in all types of structures contributed 0.8% out of the 3.4% total growth in real GDP. The price index for GDP, a broader inflation measure than the consumer or producer price index, slowed to a 2.4% annual rate of increase from 3.1% in the first quarter. The price index for investment in private nonresidential structures rose 9.7%, close to the 10.3% rate (previously 9.6%) in the first quarter. This index has risen more than the GDP price index for eight straight quarters.

“Reports from all 12 Federal Reserve districts indicate that economic activity continued to expand in June and early July,” the Fed reported in the latest “Beige Book,” released on Wednesday. Several districts reported increases in nonresidential construction and “also noted strong activity for producers of construction materials-especially cement….[There were reports of] substantial increases in the costs of energy and some building materials.”

New construction starts jumped 8% from May to June, seasonally adjusted, McGraw-Hill Construction reported on Thursday. “Nonresidential building registered sharp improvement after a lackluster May, and strong growth was also reported for nonbuilding construction (public works and electric utilities). Residential building in June edged upward, continuing to perform at an elevated pace.” Through the first six months of 2005, total starts measured by McGraw-Hill rose 5% from the first half of 2004: +9% each for nonbuilding and residential building, offsetting a drop (-6%) for nonresidential building. McGraw-Hill counts the full value of a contract in the month it starts, while Census tallies the dollars spent in a month on new and ongoing projects for its measure of value put in place. McGraw-Hill captures 55-60% of the total reported by Census.

“U.S. architecture firms reported growth in billings in June, but the pace of growth has slowed substantially since the beginning of the year,” American Institute of Architects (AIA) Chief Economist Kermit Baker reported on Thursday (www.aia.org/aiarchitect/thisweek05/tw0729/tw0729otb.htm). “In June, almost 23% of firms reported that billings had increased compared to May levels, but 14% of firms reported that they declined over this period. According to analysis conducted by the AIA, the strong growth in billings reported by firms points to an upturn in construction levels later this year, while the recent easing in growth in billings at firms points to slower growth in construction activity during the first half of 2006.”

Both new- and existing-home sales surged to record levels in June. On Wednesday, the government reported that new-home sales hit a seasonally adjusted annual rate (SAAR) of 1,374,000, up 4% from May and 14% from June 2004. The median sales price (price above which half of sales occurred) sagged to $214,800 from $227,400 in May. However, the drop is explained by a large jump in sales in the $150,000-$199,999 range, not a decline in pricier houses. The actual number of houses sold in most price ranges remained nearly constant from May to June. The total number of unsold houses also hit a record, 457,000, but the number of completed unsold houses dropped for the fourth straight month. Nearly 80% of unsold houses were either under construction or not started, suggesting that single-family construction will remain vibrant. The SAAR of unsold houses actually dropped as a multiple of the number of houses sold to 4.0 from 4.4 in January and February. “Total existing-home sales-including single-family, townhomes, condominiums and co-ops-rose 2.7% in June to a [SAAR] of 7.33 million from an upwardly revised pace of 7.14 million in May,” the National Assn. of Realtors reported on Monday. The median price was $219,000, up 14.7% from June 2004, the largest percent rise since 1980. Inventories rose 3.8%, slightly faster than sales, but the inventory/sales ratio, 4.3 months, was still moderate by historical standards. Condo and co-op sales rose 4.5%, vs. 2.4% for single-family homes.

Total compensation (wages plus benefits) for private industry workers rose 0.6%, seasonally adjusted, in the second quarter, the same rate as in the first quarter, the Bureau of Labor Statistics (BLS) reported today. Wages increased 0.6% in both quarters; benefit costs slowed to an 0.8% increase from 1.2% in the first quarter and 1.6% in fourth quarter of 2004. In construction, total compensation rose 0.9% in the second quarter and 1.1% in the first. Wages climbed 0.8% in the second quarter, 0.3% in the first. Benefit increases are not shown separately for construction but these figures imply benefits rose more slowly in the second quarter than the first.

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