Article source: ConstructConnect

Today, the Federal Reserve has chosen the middle path in raising its policy-setting interest rate by 25 basis points (where 100 basis points = 1.00). The target range for the federal funds rate is now 4.75% to 5.00%.

Worries about the banking sector not just in the U.S., but worldwide, placed the Federal Reserve in a bind with respect to its interest rate policy. SVB (Silicon Valley Bank) started the downhill ball rolling when its capitalization weakened as a result of interest rates climbing and depressing the value of its bond holdings.

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Much of Canadian construction activity ties to extraction (or harvesting) of the nation’s resources. Canada has such an abundance of resources that, with respect to most commodities, domestic demand can be readily satisfied, leaving a great deal of scope for export sales. The difference between big export dollar volumes and low import dollar volumes makes a significant contribution to gross domestic product (GDP).

In what follows, the capital spending prospects emanating from 17 Canadian material export categories are discussed and assessed. Beyond development at primary sites, there are also related undertakings in air, rail and road transportation to move product to border crossings and ports for out-of-country transportation. Plus, there are new initiatives in such fields as carbon capture and storage and hydrogen production plants.

Oil

In the 00s, Alberta arguably underwent the most spectacular building boom tied to one resource deposit in Canada’s history. Development of the Oil Sands in the northeast of the province drew in immense amounts of capital and attracted workers from across the country, especially the Atlantic Region, and from other countries. With the Oil Sands extending across the provincial border, Saskatchewan participated in the bonanza as well, to a lesser extent. Newfoundland and Labrador has also benefitted from oil development, but from offshore drilling fields.
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At +311,000, the U.S. number on net jobs creation in February, as calculated by the Bureau of Labor Statistics (BLS), was okay. It was neither truly exciting, nor in any way disturbing. It was down from the +504,000 performance in January, but it wasn’t the kind of figure that would signal a recession has arrived on everyone’s doorstep.

And that’s what we’re all watching for, indications of slowdown in the economy that might take it into negative ‘real’ (i.e., inflation-adjusted) GDP change territory. That’s not what was delivered in February’s jobs report.

But there’s a recent alternative labor market reading which, specifically for the construction industry, is concerning. It comes from the Job Openings and Labor Turnover Survey (JOLTS) and we’ll delve into that in a moment.

The U.S. economy-wide seasonally adjusted (SA) unemployment rate in February ticked up a little to 3.6% from 3.4% in January. On a not seasonally adjusted (NSA) basis, the U rate stayed the same as the month prior, at 3.9%.

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Since the Spring of last year, monthly total U.S. housing starts (annualized) have been on a downwards trajectory. The weakness in housing starts is one of the chief arguments for speculation that a recession is just around the corner.

Furthermore, the number of residential building permits, which is a leading indicator (by a month of two) for ‘starts’ is showing no signs of bottoming just yet. A key question, therefore, is when will the slide end?

Cluster Chart 1 shows that, in nearly every region, permits issued for single-family structures are the main, and in most cases sole, cause of the overall tapering off. Only in the Northeast are multiples showing a greater degree of settling down than singles. But it’s also true that only in the NE are multiples, in units, routinely a higher proportion of the total than singles.

What’s also the case, though, is that an interesting shift is underway. In the three other regions than the NE, the drops in single-family units, with accompanying relative stability in multi-family units, is leading to convergence. This is a situation that is not in keeping with historical data for the U.S. Throughout the decades, and for a variety of reasons, U.S. single-family starts have placed well above multi-family starts (both in units) as a proportion of total.
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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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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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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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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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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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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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