We’ve seen this collision before when two indicators of nonresidential construction activity are released virtually at the same time, with each moving in a different direction. The divergent reports support comments I’ve heard lately from contractors, wholesalers and manufacturers that the road to economic recovery remains a bumpy one.
In late May, the American Institute of Architects’ Architecture Billings Index trended downward for the first time in nine months, reaching its lowest point since July 2012. Yet, just two days earlier, industry consultant FMI’s 2013 Second Quarter Nonresidential Construction Index reached its highest score since the NRCI started in the first quarter of 2009.
AIA’s ABI is a leading economic indicator of construction activity, reflecting the nine- to 12-month time lag between architecture billings and construction spending. Any score higher than 50 indicates an increase in billings; lower than 50 shows a decrease in design services.
April’s ABI slipped below 50 to 48.6, down from 51.9 where it was in March. Across the country, both the South (52.6) and West (50.7) showed slight increases in billings in April. Decreases in the Midwest (49.4) and Northeast (48.2) were large enough to drop the national ABI below 50.
AIA’s related index that tracks new project inquiries remained well above 50, although it too decreased in April. It went to 58.5 from 60.1 in March.
“Project approval delays are having an adverse effect on the design and construction industry, but again and again we are hearing that it is extremely difficult to obtain financing to move forward on real estate projects,” AIA Chief Economist Kermit Baker says. “However, given that inquiries for new projects continue to be strong, we’re hopeful that this is just a short-term dip.”
Just as AIA doesn’t sound overly concerned about the drop in its billings index, FMI doesn’t appear to be overly excited about its nonresidential construction index hitting a record high.
“This isn’t a bullish trend yet,” FMI says in its report, “but it demonstrates that the nonresidential construction market continues to push upward.”
Construction company executives surveyed by FMI for its second-quarter report say they have seen little impact so far in their public works projects due to sequestration. The cutbacks in federal spending, as you’ll recall, kicked in toward the end of the first quarter.
Similarly, few of the executives have experienced labor shortages at this point, even though the construction industry lost up to 30% of its workforce during the recession. Nearly a quarter of them, however, expect severe shortages of construction laborers a year from now, along with a shortage of select craft tradespeople, such as plumbers.
On a scale of 1 to 5, with 5 indicating a severe labor shortage, exactly 0% of the executives say they’re experiencing a severe shortage of plumbers today. On the other hand, 36% give plumbers a 3 or 4 score, indicating some regional to moderately severe shortages.
A year from now, 9% of the same executives forecast a severe shortage of plumbers. Another 53% anticipate some regional to moderately severe shortages. Similar numbers appear in the survey for sprinkler fitters, pipe fitters and sheet metal workers.
The executives are looking at different solutions to lessen the impact of the expected shortages. These include training for less-skilled labor, greater use of prefabrication and working for immigrant labor reform.
“There is no question that the construction labor market has significantly retracted. It is only a matter of time before demand will exceed supply. We are really concerned about it,” one executive says. “We see a big pent-up demand for new construction developing in our backlog. We don’t have the crews to respond, but we are address-ing the issue now.”
A few companies say wages are rising due to a number of factors. These include the labor shortage, health-care reform and high wages being paid for oil exploration, such as fracking.
Overall, executives report an increase in their labor costs along with a rise in their construction materials costs. Not one of them says these costs were lower in the second quarter than they were in the first.
“While these components add to the cost of construction,” FMI states, “one can also take the view that the market is strong enough for materials producers and labor to seek increases.”
With an expected increase in their backlog, most of the executives see more projects getting the go-ahead in the third quarter. Overall, FMI forecasts 5% growth in nonresidential construction spending this year.
Bank financing, government spending cutbacks and labor shortages will challenge the construction industry. These and other bumps in the road will bear watching as the nonresidential sector gains strength.