Plumbing and Mechanical

Economic Forum in Waco; PPI falls overall, rises for construction

August 13, 2002
AGC President Larry Gaskins will participate in next week's Economic Forum with President Bush in Waco, Texas. In the plenary session and a smaller meeting beforehand hosted by Treasury Secretary O'Neill, he is expected to describe the major role of construction in the economy (5 percent of jobs, 8 percent of GDP) and several steps to enable construction to remain a key player in the recovery.

These include: continuation of income and estate tax rate cuts, bonus depreciation and 5-year net operating loss carrybacks; adoption of tax accounting simplification for long-term contracts; enactment of higher infrastructure investment levels for highways, airports, security, energy and environmental programs; and passage of a federal backstop for terrorism insurance.

The producer price index (PPI) fell 0.2 percent, seasonally adjusted, the Bureau of Labor Statistics (BLS) reported. The "core rate," which excludes energy and food prices, fell 0.3%, the biggest drop in nine months.

The story was different for construction, however. BLS stated, "Prices for materials and components for construction increased 0.2 percent in July, after inching up 0.1 percent in June. The rising indexes for fabricated structural metal products, softwood lumber, hardwood lumber, nonferrous wire and cable, air conditioning and refrigeration equipment, and plastic construction products more than offset price declines for gypsum products, plywood, millwork, fabricated ferrous wire products, asphalt felts and coatings, and switchgear."

Mortgage rates on 30- and 15-year fixed mortgages fell this week to the lowest levels in the 32-year history of Freddie Mac's weekly survey. Meanwhile, consumer credit expanded more modestly in June, 5.9 percent, than in May, 6.7 percnt, the Federal Reserve reported Wednesday. Together, these data suggest that many consumers will have the chance to refinance mortgages at lower rates and that consumers are not getting overextended.

Indeed, last week the Commerce Department reported that the personal saving rate rose in June to 4.2 percent, up from an average of 2.3 percent in 2001.

In its first release July 30, BLS stated, "Over the year ended in May 2002, the largest decline in job openings occurred in construction, where the rate fell from 3.4 percent to 1.9 percent." This suggests that demand for workers shrank, relative to the starting point, more rapidly in construction than in other industries.

Contrary to most indicators about construction, the Institute for Supply Management (ISM)'s July non-manufacturing survey of supply executives listed construction among the industries that reported the highest rates of growth of business activity and new orders (but not employment change) in July.

Consistent with the BLS price report, the survey also listed construction among the industries reporting the highest rates of increase in prices paid. Real estate was the only industry reporting a rising backlog of orders.