A Slow Climb

When the Associated Builders and Contractors (ABC) organization, Washington, D.C., reported that its Construction Backlog Indicator (CBI) for the fourth quarter of 2010 averaged 7.1 months, the statistic represented a modest bit of good news in what has been a dreary sector.

The trade group defines its CBI as “a forward-looking indicator that measures the amount of construction work under contract to be completed in the future.”

The fourth quarter 2010 average of 7.1 months was “up from 7 months in the third quarter of [2010] – an improvement of 1.4 percent,” notes ABC. “In addition, CBI is up 21.3 percent from a low of 5.8 months in the fourth quarter of 2009.”

Discovering any bright spots in a sector that has been reeling the way the construction industry has requires considerable effort.
 

HIRING FREEZE
Whether 2009 truly represented the low point for the construction industry remains to be seen.

Among the ways the Associated General Contractors of America (AGC) trade group, based in Arlington, Va., measures the health of the industry is through construction sector employment numbers.

By that measure, the construction industry did not start 2011 in a positive light. The construction unemployment rate jumped to 22.5 percent in January 2011 as the sector lost another 32,000 jobs in a 30-day span, according to the AGC’s analysis of federal employment data for the month of January.

“The new data underscores the challenges facing the industry as the stimulus winds down and demand for private and public construction remains weak,” the AGC stated in a news release accompanying its analysis.

“It may be a new year, but the construction industry is still suffering from the same economic conditions that kept its unemployment rate so high last year,” remarked Ken Simonson, the association’s chief economist. “With stimulus work starting to dry up, Congress proposing major funding cuts and private demand still weak, it is hard to see how the industry will add jobs this year.”

While harsh winter weather likely contributed to some of the industry layoffs in January, the industry has lost 130,000 jobs in the 12-month January 2010-January 2011 span, even as total private sector employment has increased by nearly 1.3 million, Simonson noted.

In Simonson’s opinion, the fact that the construction industry’s unemployment rate continues to be more than twice the overall rate has more to do with economic conditions than the weather.

The construction economist noted that the industry’s job losses came from the non-residential construction sector, which lost 35,300 jobs between December and January, while the residential sector added 3,500 jobs. Non-residential specialty trade contractors were hardest hit, losing 21,000 jobs.

Meanwhile, winter weather and stimulus wind-downs likely helped drive down heavy and civil engineering construction employment by 7,000 jobs, Simonson suggested.

Association officials said that construction employment is likely to stagnate through much of 2011 as stimulus funds dry up and public and private sector demand for construction remains weak.
 

GRADUAL PROGRESS?
In looking at the improvement in the ABC backlog index, it is unclear whether contractors are involved in more projects than they were one year ago or whether they are carrying out their current schedules with a smaller workforce and on a longer time frame.

The chief economist of the group, though, points to the longer CBI (backlog) time as good news—although good news moving at a very slow pace. “CBI continues to edge toward levels observed last spring. At that time, federally financed projects were adding to construction backlog as they moved from the planning stage to the bid selection stage,” says Basu. “However, the fourth quarter numbers indicate that federal stimulus is no longer adding to construction backlog in a meaningful way and that the recovery in many privately financed segments remains agonizingly slow. Still, CBI remains well above its historic low point of 5.5 months recorded in January 2010,” he adds.

“During the fourth quarter of last year, sources of economic improvement and growth expanded to include additional retail segments, rapid export growth and an uptick in business investment,” Basu comments. “At the same time, improvement in commercial and institutional construction became more apparent as backlog in these two sectors rose to the highest level in the history of the series,” Basu says.

Regionally, the South is supporting the largest average construction backlog at 7.8 months, and the index number “is expanding briskly” there, according to ABC.

Another region showing stronger CBI numbers is the ABC’s “Middle region,” which includes Indiana, Michigan and Ohio. The average backlog there has returned to levels of greater than six months.
 

FAR FROM SAFE
The key metric used by McGraw-Hill Construction—new construction contract values—did not offer encouraging news at the start of 2011. A drop in new project contracts is a worrisome sign that the construction sector is not yet out of the woods.

The value of new construction starts retreated 6 percent in January 2011 compared to the month before, according to a news release from the Bedford, Mass.-based organization. “The decline came as the result of a pullback for non-residential building after a strong December, combined with a loss of momentum for residential building,” the release stated in part.

The third major construction sector tracked by the group, the non-building or infrastructure sector, “showed further growth in January on top of its elevated December pace, aided by several large public works projects.”

“The construction start statistics continue to move in an up-and-down pattern, showing that overall activity has stabilized in a broad sense but has not yet gained sufficient traction for renewed expansion to take hold,” says Robert A. Murray, vice president of economic affairs for McGraw-Hill Construction. “Over the past two years, public works construction has held up fairly well, and healthy activity was reported for this sector in January.”

Among the concerns, though, is that “public works construction is likely to slip in coming months, given waning support from the federal stimulus act and mounting fiscal stress for federal, state, and local governments,” says Murray. “This fiscal stress will also have a dampening impact on various institutional building types, such as school construction.”

Whether the private sector can pick up the slack will be one of the construction industry story lines to follow in 2011.

ABC economist Basu says such a shift is already underway. “The fourth quarter 2010 data shows that the economy is increasingly shifting toward private sector momentum and away from public sector dependence. Though the recovery remains well short of two years in duration, its positive impact on construction is becoming increasingly apparent,” he comments.

“For total construction starts to register growth in 2011, it will require more upward movement from housing, after the tenuous gains witnessed during 2010,” says Murray. “It will also require some upward movement or at least stability for commercial building, after last year’s extremely depressed activity. One early positive sign for commercial building is that vacancy rates appear to have topped off during 2010, and are now receding slightly.”

Turning to the January new contract figures for a hint, “commercial structure types showed a mixed performance in January,” according to McGraw-Hill.

“Stores and warehouses slipped further, with January declines of 2 percent and 4 percent, respectively. “Office construction in January registered a 5 percent gain,” notes the McGraw-Hill news release, “helped by groundbreaking for four projects valued each in excess of $100 million. These included two corporate office buildings, located in Boston ($252 million) and in suburban Cleveland ($120 million); a federal government office building in Clarksburg, W.V. ($130 million); and a data center in Boydton, Va. ($125 million).”

For contractors and recyclers to see a sustained increase in activity, many more such projects will have to break ground as 2011 continues.