Plumbing and Mechanical

Transport, energy bills boost construction prospects but may worsen cement shortage<br>Aug. 8, 2005

August 8, 2005
Economics week of the 8th

The surface transportation and energy bills that President Bush signed into law on Wednesday and Monday, respectively, should both provide a modest but sustained boost to several categories of construction. Federal aid to state highway spending will rise by $1-2 billion per year from current levels, starting immediately. Most of this money will go into highway construction, although some will show up in transportation structures such as port and intermodal facilities. Transit facilities will also receive additional funding. The energy act provides tax incentives and reduces some regulatory roadblocks to construction of various alternative energy generation facilities and to equipping or retrofitting structures with energy-efficient systems. The amount of construction these provisions will trigger is hard to predict, as it depends on the relevant after-tax current and projected prices.

The added spending on highway construction may worsen widening cement shortages. New Mexico and South Dakota joined the list of 30 states and the District of Columbia where shortages or tight supplies have been reported to AGC or the Portland Cement Assn. (PCA) this year. On Thursday, the governors of New Mexico, South Dakota, Utah, and Nevada wrote to Commerce Secretary Carlos Gutierrez to “respectfully request that you take the appropriate steps to resolve U.S.-Mexico cement trade issues in order to provide immediate access to this critical supply of cement.” Today, AGC CEO Stephen Sandherr wrote to the four governors to thank them and express the “hope that Commerce officials and domestic producers will act promptly.” PCA raised its forecast to a 5% gain in cement consumption in 2005 from a 3% estimate last spring.

Another key construction material is steel. Yesterday, the Wall Street Journal reported that Mittal Steel, the world's largest producer after its takeover this year of International Steel Group, said its “cost of producing steel rose 40% during the [second] quarter, while selling prices increased 19% on average. [Mittal] says steel is now 'entering a new paradigm' with prices rising between $30 [and] $60 a ton, or roughly 7% to 15%, in North America for third-quarter orders.”

Inventories of manufacturers, merchant wholesalers, and retailers combined were unchanged from May to June, but rose 8% from June 2004, seasonally adjusted, the Census Bureau reported yesterday. The year-over-year increase implies moderate growing demand for warehouse construction.

The ratio of job openings to total employment (job openings rate) held nearly steady from May to June at 2.6 openings per 100 jobs overall in June and at 1.5 in construction, the Bureau of Labor Statistics (BLS) reported on Wednesday (www.bls.gov/jlt). The rates rose from 2.3 overall and 1.3 in construction in June 2004. The hires rate held steady roughly overall at 3.5, but dropped in construction to 5.4 from 5.8 in May and 6.4 in June 2004. The rate of total separations (quits, layoffs and discharges, and retirements and other) was little changed overall at 3.3 but dropped in construction to 5.1 from 5.6 in May and 5.3 in June 2004. The numbers appear consistent with last week's figures on construction spending in June and employment in July, which show moderate recent increases.

On Monday, Census released County Business Patterns for 2003, which contains data on the number of establishments by employment size, number of employees, and payroll in more than 1,100 industries (including 40 construction segments) for the nation, states and counties. An establishment is a permanent business location, not a temporary jobsite; most construction firms have one establishment per company. The number of construction establishments rose from 700,000 in 2002 to 732,000. All of the growth was in establishments with fewer than 20 employees; the number with 500 or more employees dropped from 467 to 435. This probably reflects a tendency for large contractors to turn more to subcontracting and outsourcing rather than maintaining large, diversified workforces on their own payrolls. There were 461,000 establishments among specialty trade contractors, 177,000 in residential building, 51,000 in heavy and civil engineering, and 43,000 in nonresidential building.

In late July, the Office of Advocacy of the U.S. Small Business Administration posted data on establishment and employment changes from firm births and deaths in 2001-2002, based on Census data. Adding to the 602,000 construction establishments with employees in March 2001 were 79,000 new firms (13%). About 2,000 establishments were added by existing firms. However, 81,000 firms closed (13%), as did 1,000 establishments of firms that stayed in business, for a net decrease of 1,800 establishments.