Employment cost increases slow in second quarter; materials costs are mixed in July

            The Bureau of Labor Statistics (BLS) today released the employment cost index, a measure of compensation (wages, salaries and benefits, including required payments), for the second quarter of 2017 (2017Q2). In the private sector as a whole, compensation increased 0.5%, seasonally adjusted, from March to June (down from 0.8% in Q1) and 2.4% from June 2016 to June 2017 (unchanged from the year before). Compensation for all employees in the construction industry increased 0.4% in Q2 (vs. 1.0% in Q1) and 2.2% over 12 months (vs. 2.5% in the prior 12 months). Compensation for private-sector employees in construction, extraction, farming, fishing and forestry occupations (mainly construction trades) increased 0.5% in Q2 and 2.4% from 2016Q2 to 2017Q2, down from 2.6% in the previous four quarters. Wages and salaries for these occupations increased 0.5% in Q2 and 2.6% over four quarters (vs. 2.9% over the prior year). Wages and salaries for all construction-industry employees increased 0.4% in Q2 and 2.3% over four quarters (vs. 2.7% over the prior year.) The deceleration from a year ago for wage costs (and total compensation) in the construction industry and trades is surprising, given continued reports of tight labor markets. It may reflect increased retirements of experienced workers and replacement by lower-paid new entrants.

            Recent construction materials price movements have been mixed. Consultancy IHS Markit and the Procurement Executives Group (PEG) reported on Wednesday, "Construction costs rose again in July [for the ninth consecutive month.] Both material/ equipment and labor had few categories with falling prices. While the material/equipment sub-index rose, the labor sub-index showed some weakness. The material/equipment price index came in at 52.4 in July, slightly higher than the June figure of 51.3" on a scale from 0 to 100 in which a reading higher than 50 represents upward pricing strength; below 50, downward pressure. "Price increases were uneven. Seven of the 12 categories tracked in the materials index showed higher prices, three categories registered flat pricing" (ocean freight from Asia to U.S., carbon steel pipe and ready-mix concrete) and two had falling prices (fabricated structural steel and ocean freight from Europe to U.S.). Deni Koenhemsi, senior economist with Pricing and Purchasing at IHS Markit, commented, "'Ready-mix concrete prices rose during the first half of the year, although not as strongly as 2016....Producers of ready-mix concrete and cement choose to push price increases in the cement category. Although cement is an important input cost for concrete, price increases are not completely filtering down to ready-mix.' The current subcontractor labor index fell in July, with the index coming in at 48.7." In contrast, New South Construction Supply reported in its July newsletter on Thursday, "As has been the trend for the past several months, prices for most of the items we distribute were unchanged in July and few of our suppliers announced future price increases....Wire rod manufacturers were unable to push through a $20/ton price increase in July and as a result, concrete reinforcing wire mesh prices were basically unchanged in July....polyethylene and polyolefin vapor barrier manufacturers have indicated they will hold their current prices through August and possibly through September."

            Inflation-adjusted gross domestic product (real GDP) increased 2.6% at a seasonally adjusted annual rate in Q2, up from 1.2% in Q1, the Bureau of Economic Analysis (BEA) reported today. Real gross private domestic investment in nonresidential structures (including wells and mines) increased 4.9% (vs. 15% in Q1). Investment in commercial and health care structures declined 5.4% (vs. a 2.0% gain in Q1); manufacturing structures, -10.6% (vs. 1.7%); power and communication structures, -12% (vs. -16%); and other structures, -12% (vs. -1.8%). Real residential investment declined 6.8% (vs. an 11% increase in Q1). Real government gross investment in structures plunged 9.0% (vs. a gain of 0.2% in Q1). The GDP price index increased 1.0% (vs. 2.0% in Q1). The price index for nonresidential structures investment climbed 3.8% (vs. 3.1%). The price index for residential investment rose 4.1% (vs. 1.7%). The price index for government investment in structures rose 2.6% (vs.4.1%).

            The National Association for Business Economics released its latest quarterly business conditions survey on July 17. Of the 70 corporate and trade association economists who reported on capital spending on structures at their firms in Q2, 20% reported an increase from Q1, while 10% reported a decrease, for a net increase of 10% (vs. a net of 6% in Q1 from 2016Q4). For the next three months, 13% expect an increase in structures spending at their firms, while 10% expect a decrease.

            "Big businesses have embraced flexible work practices, but fewer of them seem to favor full-time work from home," the Wall Street Journal reported on Wednesday, listing five large firms that "are among employers that have ended or reduced remote-work arrangements recently...the portion of U.S. workers who performed all or some of their work at home fell to 22% last year, from 24% in 2015." This trend could add to demand for office construction. 

            The homeownership rate in Q2 rose to 63.9% of households, seasonally adjusted, from 63.7% in Q1 and 63.1% in 2016Q2, the Census Bureau reported on Thursday. The National Association of Home Builders noted in its Eye on Housing blog on Thursday, "Compared to a year ago, homeownership increased among all age groups, with the largest gains recorded by millennials. The millennial homeownership rates increased 1.2% [the most of any age group]. This suggests that households, especially younger and middle-age homebuyers, are gradually returning to the housing market after the Great Recession." A continuing increase in the homeownership rate is likely to reduce demand for multifamily rental construction.

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