In a recent e-mail, MHC Vice President for Economic Affairs Robert Murray wrote, “Preliminary June McGraw-Hill construction starts reveal the following comparisons for the January-June period of 2007-nonresidential building is unchanged from a year ago, while the combination of nonresidential building, public works and electric utilities is up 2%.” The stark difference from Reed’s nonresidential estimates (22% for building, 20% for the total) is attributable in part to using different dates for recording the start of projects or different timing for revisions. Louis Centorcelli, Reed’s Director of Business Development-Market Analytics, wrote in an email today, “this results in a very consistent pattern of revisions over time-the Reed data tends to overstate the market and the MHC data tends to understate the market. Using the publicly available press releases issued by MHC every month, I have calculated the current YTD (thru May) MHC revisions history for 2006 to be +11%; the same Reed data is running at a revision rate of -11%....When one looks at the 12-month moving totals [for nonresidential building starts], the Reed data shows an increase of 10% for the 12 months ending May 2007 versus the same period a year ago,” whereas Murray estimated the change as 5%, a much smaller difference between Reed and MHC than in the five-month YTD comparisons. Murray said the combination of nonresidential building, public works and electric utilities was up 8% on a 12-month basis.
Most respondents to a question accompanying the last two Data DIGests indicated that residential activity remains very weak, while nonresidential activity is strong and perhaps getting more so. D.R. Horton, the largest homebuilder by number of closings, reported a 40% drop in net houses sold in April-June 2007 compared to April-June 2006. The cancellation rate (sales orders canceled divided by gross sales orders) for the quarter was 38%. These figures are worse than the recent drops in sales reported by Census (new homes) or the National Association of Realtors (existing homes).
Bureau of Labor Statistics (BLS) data on construction employment so far have shown much smaller drops in residential jobs and smaller gains in nonresidential jobs than Census figures on construction spending or company reports would suggest. BLS reported on July 6 that payroll employment in residential building and residential specialty trades combined fell 3.7% from the first quarter of 2006 to the latest three months (April-June), while Census data released on June 29 show residential construction spending fell 20% (through March-May 2007). Conversely, BLS reported that nonresidential building and specialty trades employment rose only 3.5%, even though private nonresidential spending (an approximation of nonresidential building spending) rose 21%. One possible explanation for the discrepancy is that many of the “residential” specialty trade workers, such as electricians, plumbers, wallboard installers and masons, are now doing nonresidential work but are still counted as residential construction workers, based on the industry code their employers used since first reporting to BLS. A reclassification of about 550,000 such workers (out of 2,300,000) would reduce residential employment by 20% and raise nonresidential building employment by 20%, nearly matching the 21% gain in spending. Such a switch would also be consistent with readers’ reports that many subcontractors have turned from housing to commercial work.
The Office of Management and Budget (OMB) issued its annual Mid-Session Review. Although the overall deficit projections shrank, the report projected that the Highway Account of the Highway Trust Fund would be “insolvent by approximately $4 billion in [fiscal] 2009.” That compares to a deficit of just $0.2 billion that was projected in the Administration’s Budget five months ago, and would require a cut in new highway construction funds to the states of roughly $16 billion in FY09 unless Congress adds new revenue or waives current budget rules. OMB did not explain the deterioration. It may result from a combination of higher gas prices that have held down gas purchases and, thus, gas tax receipts, and a slower economy that cut into purchases of trucks, diesel fuel, truck tires and related receipts.