The Federal Reserve's Federal Open Market Committee, with Alan Greenspan chairing for the last time, voted 10-0 to raise its short-term interest rate target for the 14th straight time by 25 basis points, to 4.5%. The Committee accompanied its vote with the explanation, “Although recent economic data have been uneven, the expansion in economic activity appears solid. Core inflation has stayed relatively low in recent months and longer-term inflation expectations remain contained. Nevertheless, possible increases in resource utilization as well as elevated energy prices have the potential to add to inflation pressures. The Committee judges that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance.” This last sentence suggests that another rate increase is likely in the near future, although the committee will be headed then by a new Fed Chairman, Ben Bernanke, who was confirmed by the Senate minutes after the Fed announcement.

Among the “uneven data” was a report yesterday from McGraw-Hill Construction that the value of new construction contracts slipped 1% in December at a seasonally adjusted annual rate. Residential building contracts were down 2% for the month, while nonresidential building and nonbuilding contracts each rose 2%. For 2005 as a whole, new contracts were 10% higher than in 2004, led by a 14% gain in residential contracts. Nonresidential rose 5%, and nonbuilding, 7%. These numbers are not adjusted for inflation.

Recently, the Bureau of Economic Analysis (BEA) reported that real (net of inflation) gross domestic product increased at a seasonally adjusted annual rate of only 1.1% in the fourth quarter, down from 4.1% in the third quarter. The slowdown may have been due partly to one-time factors such as Hurricanes Rita and Wilma and delays in federal spending from late passage of appropriations bills. Real investment in structures by business, households, and government slowed to 2.5% from 3.3% in the third quarter and 8.4% in the second. Real investment in private nonresidential and residential structures increased 0.7% and 3.5%, respectively, down from 2.2% and 10.6% in the third quarter and 2.7% and 10.9% in the second quarter. The price indexes for private nonresidential structures and residential investment increased 19.5% and 7.1%, up from 16.5% and 6.5% in the third quarter and 9.9% and 4.3% in the second.

The huge jump in the price index for nonresidential structures is at variance with recent reports from the Bureau of Labor Statistics (BLS). BLS reported that the employment cost index for wages and benefits in construction slowed sharply in the fourth quarter, to 0.5% seasonally adjusted (but not annualized) from 1.2% in the third quarter and 0.9% in the second. Wages and salaries rose 1.0%, implying that benefit costs (not shown separately) actually fell. Two weeks ago, BLS reported that producer price indexes for both finished buildings (warehouses) and for inputs for most types of construction slowed in the fourth quarter.

Union membership in construction fell by 53,000 (4.8%) in 2005, even as total construction employment jumped 498,000 (6.7%), BLS reported on January 20. Union membership fell from 1,110,000 out of 7,550,000 construction employees (14.7%) in 2004, to 1,057,000 out of 8,053,000 (13.1%) in 2005. These figures imply that nonunion employment rose 556,000 (8.6%), from 6,440,000 to 6,996,000. In the private sector as a whole, union membership climbed by 50,000. The median weekly earnings of full-time wage and salary workers in construction rose from $893 in 2004 to $933 in 2005 (4.4%) for union members and from $588 to $590 (0.3%) for nonunion workers. The median is the point at which half the workers earned more, and half earned less. The tiny increase for nonunion construction employees does not imply that individual workers received no increase, but rather that most of the 556,000 added workers were hired at less-than-median wages, as would be expected in an industry that is rapidly expanding employment.

Another perspective on wages comes from BLS's January 11 report on employment and wages by industry in the 10 largest counties. From the second quarter of 2004 to the same quarter of 2005, the average weekly wage in construction rose 3.6% nationally, vs. 3.9% for all industries, even though employment growth from June 2004 to June 2005 in construction (4.7%) was nearly triple that of the whole economy (1.7%). In the largest counties, larger construction employment gains were generally accompanied by larger wage gains. Construction employment soared 15% in Maricopa (Phoenix area) and 14% in Miami-Dade, where wages rose 5% and 7.2%, respectively. Conversely, construction employment dropped 1.5% in Cook (Chicago area) and 0.2% in New York County (Manhattan), where wages changed by +3.4% and -0.7%, respectively.

The national housing rental vacancy rate for the fourth quarter was 9.6%, the Census Bureau announced today. Census said the rate was statistically “not different” from the 9.9% rate in the third quarter or the 10.0% rate in the fourth quarter of 2004. This suggests there is little if any improvement so far in the demand for rental housing construction.