News headlines, articles tell mixed stories on impact of rising costs; Dodge starts climb

            Headlines on recent news stories suggest rising construction materials and labor costs are pushing up project prices and may be contributing to cancellations, but the articles point to other possible explanations. On Wednesday, the Orlando Sentinel had an article titled, "Orlando airport plans for a new terminal already face cost inflation." The story reported, "Airport staff are recommending the Greater Orlando Aviation Authority spend $350 million more—$2.15 billion, up from $1.8 billion—because other construction in the region, including the overhaul of Interstate 4, is driving up the cost of steel, concrete and labor....Airport staff cited two additional reasons for a price hike: a more costly baggage system and technology improvements." On Monday, an article in the Minneapolis Star Tribune had the head and subhead, "Hy-Vee cancels plans for White Bear Lake store; Construction costs for supermarket and fitness center rose too high." However, this article also mentions factors not related to materials or labor costs that may have prompted the decision. In addition, plans announced in the past two weeks by discounters Aldi, Lidl and Amazon to enter or greatly expand their presence in the grocery business may cause other chains to trim their expansion plans. While the costs of materials, labor and services used by contractors have accelerated slightly in recent months, the producer price index for new nonresidential buildings has only risen about 1% over the past year, as shown by AGC tables based on BLS data posted on June 13. Readers are invited to send comments and articles to simonsonk@agc.org as to whether cost increases are affecting project prices or cancellations.

            The value of new construction starts edged up 1% from April to May at a seasonally adjusted annual rate, Dodge Data & Analytics reported on Wednesday. "Public works construction bounced back 30% from its subdued April amount, helped by the May start of four large pipeline projects totaling a combined $3.0 billion. This enabled the nonbuilding construction sector (which also includes electric utilities and gas plants) to register a 23% gain in May, offsetting modest 4% declines for both nonresidential building and housing. Through the first five months of 2017, total construction starts on an unadjusted basis were...down 5% [year-to-date (YTD)]. If the volatile manufacturing plant and electric utility/gas plant categories are excluded, total construction starts [would be up 2% YTD.] Nonbuilding construction fell 25% [YTD], with electric utilities/gas plants down 67% while public works construction was down just 3%. Nonresidential building grew 5% [YTD], with institutional building up 17%, commercial building down 5%, and manufacturing building down 9%. Residential building [YTD] was flat, with single family housing up 8% while multifamily housing decreased 17%."

            The Architecture Billings Index recorded the fourth consecutive month of growth in May with a score of 53.0, up from 50.9 in April, the American Institute of Architects (AIA) reported on Wednesday. The index measures the percentage of surveyed architecture firms that reported higher billings than a month earlier, less the percentage reporting lower billings, and any score over 50 indicates billings growth. AIA says the index "reflects the approximate 9-to-12 month lead time between architecture billings and construction spending." The scores for the four practice specialties were all above 50 (based on three-month moving averages): mixed practice, 55.8, up from 55.1 in April; residential (mainly multifamily), 51.3, down from 52.4; commercial/industrial, 51.2, down from 52.0; and institutional, 51.2, down from 52.8.

            "Nationwide, employers in all 13 industry sectors expect to add staff in Q3 [July-September] 2017," ManpowerGroup reported on June 13 in a release describing its quarterly survey of hiring plans among 11,000 U.S. employers. "...employers in Michigan, Nebraska, Colorado, Iowa and Rhode Island report the strongest Net Employment Outlooks ," which are derived by taking the percentage of employers anticipating an increase in hiring activity minus the percentage expecting a decrease. Hiring plans among construction employers "remain relatively stable quarter-over-quarter" at the national level and in the West, "slightly weaker" than in the second quarter in the Midwest and South, and "moderately weaker" in the Northeast.

          "State and local government tax revenues continue to grow at an extremely slow pace," the Rockefeller Institute of Government reported on June 13. "Overall, state governments have been hit harder by slowing tax revenue growth than local governments. Some state and local governments—particularly those that rely heavily on sales taxes or income taxes, as some large cities do—and local governments in oil-producing states are likely to be faring much worse than average....Local governments as a group rely heavily on property taxes, which are relatively stable but weakened somewhat in [Q4 2016], growing by 4.0%, compared with a 5.1% average in the prior four quarters....Total state government tax revenue from all sources grew 1.4%. This continues the weakness seen in recent quarters. It is slower than the 1.8% growth of [Q3], and is slightly negative after adjusting for inflation....Taken as a whole, the weak [Q4], the stronger [Q1] income tax that may reflect taxpayer gaming of federal tax rates, and bad April tax returns suggest more gloom for state budgets as the new state fiscal year is about to begin." Weakness in state and local revenue collections is likely a major reason that state and local construction put in place declined 5.4% YTD in January-April 2017, compared to the first four months of 2016, according to Census Bureau data posted on June 1. In addition, "Motor fuel sales tax collections in [Q4] increased by 0.9% from the same period in 2015. Seventeen states reported declines in motor fuel sales tax collections" in Q4. State fuel tax collections are one determinant of funding for highway and street construction, which decreased 3.8% YTD through April, Census data show.

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