Plumbing and Mechanical

Week of Oct. 27-Nov.1, 2004<br>Value of construction remains at record level, pushed by higher materials, labor costs

November 1, 2004
The value of construction put in place in September tied the record set in August of $1.014 trillion at a seasonally adjusted annual rate, the Census Bureau reported today. For the first nine months of 2004, value put in place rose 9% from January-September 2003. Gains were widespread. Private residential construction rose 15%, while private nonresidential and public construction were up 4% each. Of the three residential components, single-family jumped 22%, multi-family gained 10%, and improvements were flat. Four private nonresidential components reported substantial gains: lodging (+12%), amusement and recreation (+11%), health care (+10%), and office (+8%). The largest subcomponent, commercial (retail and wholesale), rose 5%. Four private nonresidential components fell: power, educational, and religious were down 5%, and manufacturing was down 2%. Five of the six largest public components were up: highway and street construction (+6%), education (+3%), transportation (+2%), sewage and waste disposal (+8%), and office (+5%); amusement and recreation fell 8%.

The Census data are not adjusted for inflation, but other releases (below) suggest construction costs rose substantially in the third quarter and in October.

Real (net of inflation) gross domestic product rose 3.7% in the third quarter at a seasonally adjusted annual rate, up from a 3.3% rate in the second quarter, BEA reported Friday. Real investment in private nonresidential structures (including mining and oil and gas drilling structures) gained 1.4% in the third quarter, down from a 6.9% pickup in the second quarter. The third-quarter level was 2% higher than a year ago. The price index for private nonresidential structures accelerated for the fifth straight quarter, rising 9.8% after a 7.6% increase in the second quarter.

The employment cost index, the broadest measure of employers' costs for wages and benefits, rose 0.9% in the third quarter, seasonally adjusted, matching the second-quarter increase, the Bureau of Labor Statistics reported Friday. Wages and salaries increased 0.7%, a slight rise from the first- and second-quarter increases of 0.6% each. The rise in benefits slowed sharply, to 1.1%, from 1.8% in the second quarter and 2.4% in the first. Total compensation in construction rose 0.7% in the third quarter, vs. 0.5% in the second. Construction wages and salaries climbed 0.8% in the third quarter after edging up 0.1% in the second. Benefits data are not presented for construction but evidently the increase slowed sharply.

Manufacturing activity grew in September but at a slower rate than in August, the Institute for Supply Management (ISM) reported today, based on its monthly survey of manufacturing procurement executives. “New orders and production remain strong, and employment continues to expand. However, energy prices and commodity price inflation are major concerns for manufacturing buyers,” said Norbert Ore, chair of ISM's Manufacturing Business Survey Committee. Respondents reported numerous items were up in price from August, including several important to construction, including: aluminum extrusions, copper products, diesel fuel, freight, lumber, plastic resins, and steel products. Items listed in short supply included steel products.

The “Beige Book,” a summary of informal surveys of current business conditions in the 12 Federal Reserve districts that was released Wednesday, “generally indicated that economic activity continued to expand in September and early October….Residential construction and real estate activity was robust again in most Districts, although it appeared to soften further from the last Beige Book. New York was the only District to report a general increase in housing market activity. Boston and Kansas City said that sales of high-end homes had softened, and Cleveland reported weakness at all price points. Home prices continued to increase at a healthy pace in most areas. However, a Realtor in Minneapolis suggested some slight price reductions, and homebuilders in the Cleveland and Dallas Districts reportedly raised incentives and/or lowered prices to spur demand. On balance, nonresidential activity remained weak in most Districts, but there were scattered signs of improvement. Chicago and Dallas noted some pickup in office markets, and Cleveland reported particular strength in the light industrial segment. The Richmond and Chicago Districts said that retail real estate activity remained robust….Firms across the nation also expressed concern about higher input costs, particularly for energy and petroleum-based products, metals, and construction materials. Three broad industry categories were disproportionately affected by these increases: transportation, manufacturing, and construction….Prices continued to rise for building materials in short supply, such as metals, concrete, and lumber. Here again, many builders had to absorb the higher input costs, but builders in the Cleveland and Kansas City Districts were able to pass along at least some of these increases to homebuyers.”

Sales of new one-family homes in September rose 3.5% from the August level at a seasonally adjusted annual rate and were 7% higher than in September 2003, the government reported Wednesday.