Plumbing and Mechanical

Feb. 26 - March 2 - Construction spending sags overall but nonres rises

March 2, 2007

Construction spending in January skidded 0.8%, at a seasonally adjusted annual rate (SAAR), from an upwardly revised December total, the Census Bureau reported on Thursday. The January figure was pulled down by a 1.7% drop in residential construction, the 10th straight decline. Nonresidential spending rose 0.2%. Compared to January 2006, spending was down 1.2% overall and down 13% for residential but up 14% for nonresidential, which surpassed the residential subtotal for the first time since 2002. Private residential components diverged greatly: new single-family fell 4.2% for the month and 26% year-over-year; new multi-family, -1.9% and +4.6%; residential improvements, +3.1% and +19%. Among large private nonresidential categories, lodging soared 3.1% and 59%; office leaped 3.4% and 34%; hospitals, +0.4% and +25%; multi-retail, +3.8% and +18%; manufacturing, +4.3% and +17%; electric power, -13% and +8%. Among large public categories, highway and street rose 3.2% and 12%; educational, -2.6% and +8.8%; transportation, +0.7% and +20%; and sewage and waste disposal, +1.0% and +11%.

Manufacturing construction seems poised to rise more. On Tuesday, Toyota announced it would build a $1.3 billion plant to assemble sport-utility vehicles near Tupelo, Mississippi. On Wednesday, Energy Secretary Samuel Bodman announced the agency would invest up to $385 million in six plants to make ethanol from various sources. The total investment is expected to be at least $1.2 billion, in plants near Emmetsburg, Iowa; Colwich, Kansas; LaBelle, Florida; Corona, California; Shelley, Idaho; and Soperton, Georgia.

Electric power construction may be scaled back from previously announced growth plans. On Monday, a private-equity group announced it would buy out Texas utility TXU and cancel eight of 11 planned coal-fired plants. On Wednesday, Duke Energy announced that North Carolina utility regulators had approved only one of two coal-fired plants it sought to build and that it would await a final order and air-quality permits before deciding how to proceed. But transmission construction is growing. Engineering News-Record reported on February 19 that a new “Electricity Transmission Overview” by brokerage firm A.G. Edwards & Sons predicted, “We are in the early stages of what will likely be a multiyear build-out of the nation’s electric transmission system…” An “Energy Data Alert” issued in December by the Edision Electric Institute, the trade association for investor-owned utilities, found, “From 2006-2009, preliminary results indicate that the industry is planning to invest $31.5 billion…nearly a 60% increase over the amount invested from 2002-2005.”

Several indicators this week suggest that price increases are not a widespread problem in the economy but are for some construction materials. The Bureau of Economic Analysis (BEA) reported on Wednesday that real (net of inflation) gross domestic product (GDP) increased 2.2% (SAAR) in the fourth quarter, not 3.5% as BEA had initially estimated a month ago. The price index for GDP rose just 1.7% (SAAR), down from 1.9% in the third quarter, but the price index for nonresidential structures (including mines and wells) climbed 5.4%, up from 5.3%. Real investment in nonresidential structures fell 0.6%, after rising 10% in the third quarter. Summarizing its February survey of manufacturing purchasing executives, the Institute for Supply Management reported on Thursday, “While the prices manufacturers pay reached their highest level in five months, concern about prices is still minimal due to the small number of commodities indicated as up in price.” But those items included two important to construction: aluminum and stainless steel. Copper was reported down in price. Today, “The Friday Report” of the Institute of Scrap Recycling Industries (www.isri.org) cited several reports of higher prices for hot-rolled steel, and for ferrous, aluminum and copper scrap.

Housing indicators this week were mixed. On Thursday, the Office of Federal Housing Enterprise Oversight (OFHEO) reported that the value of single-family houses appreciated 1.1% nationally in the fourth quarter, up from 1.0% in the third quarter. For the four quarters since late 2005, appreciation averaged 5.9%. The highest four-quarter appreciation was in Utah, 18%; Wyoming, Idaho and Washington, all 14%; and Oregon, 13%. Last was Michigan, -0.4%; just behind Massachusetts, 0.5%; Ohio, 1%; Minnesota and Indiana, both 2%. OFHEO noted, “California saw quarterly appreciation rates that were negative in 21 of the 26 [ranked] metropolitan areas. Nevada, which had the highest statewide appreciation in the nation two years ago, is now ranked 40th. [In the fourth quarter,] Nevada prices declined 0.2%.” OFHEO measures the value of all sales and refinancings in a quarter for houses with “conforming, conventional” loans backed by Freddie Mac or Fannie Mae. On Wednesday, Census reported that contracts signed in January for sales of new single-family houses plunged 17% (SAAR) from December and 20% from January 2006. The inventory of unsold houses, a tentative signal of future construction, leveled off after dropping for four months. On Tuesday, the National Association of Realtors reported that existing-home sales in January rose 3.0% (SAAR) from December but were 4.3% below the January 2006 rate. Existing-home sales measure closings for contracts typically signed 45-60 days earlier.