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Archive for February, 2023

Inflation, Recession and Construction in Game of Musical Chairs

Wednesday, February 22nd, 2023

Article source: ConstructConnect

The dreaded and ballyhooed recession remains at bay for the moment. In fact, much of the recent news concerning the economy has been great. GDP growth at the end of last year was remarkably strong. Jobs creation is still super-charged. Unemployment rates are holding fast at minimal levels. Retail sales have been booming. ConstructConnect’s own ‘starts’ statistics, supported by ‘mega projects’, began 2023 with a bang. And inflation is continuing to abate.

That last point is especially important. Current recessionary fears stem mainly from the financial side of business and personal affairs. Climbing interest rates make it harder to pay for loans and inhibit all manner of borrowing. Pricier mortgage rates tamp down new and resale home buying. Plus, banks inevitably become more careful with their lending. Capital spending on medium and smaller-sized construction projects is often a casualty.

The fact that interest rates are up, although not nearly as dramatically as one might suppose  ̶  i.e., see Graphs 7 and 8 for historical context  ̶  rests squarely with inflation. The Federal Reserve and the Bank of Canada and other central banks around the globe have been lifting rates to try to rein in prices (which is also to say, costs).

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U.S. and Canadian 2022 Construction Overviews

Monday, February 20th, 2023

Article source: ConstructConnect

2022 snapshot

US construction starts grew 16.7% in 2022 to $912 billion. A record value for mega-projects (projects valued above $1 billion) was posted in 2022 with 31 such projects started for a total value of $105.3 billion. Non-residential building starts grew 36.7%, driven by new factory building. Civil engineering starts grew 26.9% in 2022 with all sectors expanding except for the miscellaneous civil engineering sector. New residential construction, by contrast, fell 2.2%. On a regional basis, new construction grew in all four major regions, led by construction in the South.

Canadian construction starts declined 12.1% in 2022 to C$89.6 billion. New construction for residential building, non-residential building, and civil engineering all declined at a similar pace of 12.2%, 13.9%, and 9.5% respectively. There were large divergences in growth across the non-residential and civil engineering sectors, and unlike in the US, growth dynamics were not driven by mega-projects.

U.S. year in review

US GDP had a slow start to the year, contracting in each of the first two quarters. However, the composition of growth was less worrying as inventory destocking contributed to the negative reads early in the year. Economic growth rebounded in each of Q3 and Q4 with full-year growth in 2022 coming in at 2.1%. High inflation—with the consumer price index (CPI) peaking at 9.1% year-on-year (y/y) in June—was a major theme in 2022. While CPI inflation has eased back since then, ending the year at 6.5% y/y, it remains considerably above the Federal Reserve’s 2% target. In March, the Fed raised its benchmark interest rate by 25 basis points (bps), beginning a series of aggressive rate hikes. This was followed by a 50bps increase in May, then four successive 75bps increases in June, July, September, and November, before a final 50bps rise in December. The policy rate ended the year in a range of 4.25-4.5%, and the Fed increased its rate a further 25bps at its meeting in February 2023. Higher interest rates have fed through to 30-year fixed mortgage rates, which peaked above 7% in November.

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Canada’s Big Jobs Advance in January Defies Expectations

Monday, February 13th, 2023

Article source: ConstructConnect

In January, the U.S. recorded a big employment increase, +517,000 jobs. In the same month, and with a considerably smaller population base, Canada followed suit, +150,000 jobs.

In relative terms, since the U.S. has a population that is nine times that of Canada’s, the jobs pickup north of the border was even more impressive.

The +150,000-employment gain for Canada was the best monthly increase in nearly a year, dating back to February 2022 (+358,000), when pandemic-devastated sectors were springing back to life.

Canada’s seasonally adjusted (SA) unemployment rate stayed the same in January as in December, 5.0%. The not seasonally adjusted (NSA) unemployment rate calculated using the same methodology as is adopted in the U.S. rose to 4.5% from 3.7%. The 4.5% figure, however, wasn’t far off the comparable U.S. NSA unemployment rate of 3.9%.

Graph 3 shows how closely U.S. and Canadian U rates have been tracking. It also illustrates the minimal negative impacts on labor markets that have occurred so far from the hikes in interest rates on both sides of the border.

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Moderation in Canadian Construction Material Costs

Friday, February 3rd, 2023

Article source: ConstructConnect

As a follow-up to an article on U.S. construction material costs, the table and charts in this piece look at what has been happening in Canada. Generally speaking, the story in both countries is the same. While some inputs into construction are continuing to show price increases that are way up year over year, there are also instances of big declines. Furthermore, the trend over the latest three months decidedly features price retreats rather than advances.

In the U.S., the most comprehensive compilation of material costs, expressed in index form, are to be found in the Producer Price Index (PPI) data series compiled by the Bureau of Labor Statistics. The Canadian equivalent is the Industrial Product Price Index (IPPI) data set produced by Statistics Canada.

Table 1 sets out the results for 27 building material or other non-man-hour inputs (e.g., equipment) into construction. The red and yellow arrows highlight the biggest price shifts. For year-over-year price movements, the red arrows point to gains of +20% or more; the yellow arrows, to declines of -20% or more. There are a few more big gains that retreats (4 red to 2 yellow arrows).
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Higher Interest Rate Regime Not Slowing U.S. Jobs Creation Juggernaut

Friday, February 3rd, 2023

Article source: ConstructConnect

The U.S. total number of jobs count rose by more than half a million in January, according to the latest Employment Situation report from the Bureau of Labor Statistics (BLS). The climb in employment of +517,000 positions was double the increase in the preceding month of December.

There were only two months last year when the month-to-month increase in jobs was higher, in February (+904,000) and July (+568,000).

The seasonally adjusted (SA) unemployment rate in the first month of 2023 dipped to 3.4% from 3.5% the month prior.

The tighter interest rate regime being imposed by the Federal Reserve is having an impact on portions of the economy, such as single-family housing starts, but it is clearly not doing much to slow the juggernaut that is U.S. jobs creation.

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Era of Construction Bid Prices Chasing Material Cost Increases Nearing End

Wednesday, February 1st, 2023

Article source: ConstructConnect

Graph 1 below shows the moderation in construction material costs that has been taking place. There’s about a 50-50 split between items with year-over-year price increases versus those with y/y declines.

But that’s December 2022 compared with December 2021. When the focus is narrowed to just the latest three months, the easing in prices is more evident. For the 15 input items, 11 experienced a drop in price from September to the end of 2022. And as for the four other items, none of the latest three-month increases was greater than +2.9%.

From Graph 2, the shout-out days of extraordinary y/y material cost increases, mainly in 2021, have now receded. In the Producer Price Index data series compiled by the Bureau of Labor Statistics, there are two specific material input indices, one with a longer history and a limited number of components, the other with a shorter history, but a more comprehensive make-up. (The two indices are explained more fully in a text box accompanying Graph 2.)

The average year-over-year change for those two indices has dropped to just +2.4%. The PPI ‘construction final demand’ index, generally taken to be equivalent to a ‘bid price’ index, has retreated a little, but remains elevated at +18.5% y/y.

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