GDP increases 3.5% but investment in structures plunges; Beige Book cites rising costs

            Inflation-adjusted gross domestic product (real GDP) increased 3.5% at a seasonally adjusted annual rate in the third quarter (Q3) of 2018, following a 4.2% gain in Q2, the Bureau of Economic Analysis (BEA) reported today. Real gross private domestic investment in nonresidential structures (including wells and mines) tumbled 7.9% (vs. a 15% increase in Q2). Real investment in commercial and health care structures declined -4.9% (vs. -4.6%); manufacturing structures, -5.0% (vs. -21%); power and communication structures, -13% (vs. 11%); and other non-mining structures, -5.6% (vs. 4.4%). Real residential investment declined 4.0% (vs. -1.3%). Real investment in single-family structures decreased 6.2% (vs. -4.5%); multifamily structures, -16% (vs. -1.7%). Real government gross investment in structures soared 14% (vs. 5.7%). Federal investment jumped 35% (6.8% for defense structures and 45% for nondefense structures); state and local investment increased 12%. The GDP price index increased 1.7% (vs. 3.0% in Q2). The price index for nonresidential structures investment climbed 3.1% (vs. 5.1%). The price index for residential investment rose 4.0% (vs. 7.3%). The price index for government investment in structures rose 3.1% (vs. 7.6%).

            "Economic activity expanded across the United States, with the majority of Federal Reserve districts reporting modest to moderate growth" in September and the first half of October, the Federal Reserve reported on Wednesday in its latest "Beige Book." The report is a compilation of informal soundings of business conditions in the 12 Fed districts, which are referenced by the name of their headquarters cities. "Employers throughout the country continued to report tight labor markets and difficulties finding qualified workers, including highly skilled engineers, finance and sales professionals, construction and manufacturing workers, IT professionals and truck drivers." AGC compiled construction-related comments from the summary and district write-ups. Among the comments, Boston noted, "Construction costs continued to climb at a brisk pace in response to increases in the costs of construction labor, land and raw materials, and one contact expects the higher costs to get passed on to tenants and buyers....Contacts continued to see downside risks, however, in the form of rising construction costs and rising long-term interest rates." Cleveland reported, "Strong, upward pressures on fuel, building materials and metals costs were noted. Nonresidential construction activity improved slightly." Richmond commented, "Nonresidential construction prices are rising as builders pass through increasing materials costs, especially for metals, but builders are not increasing their margins."             

            There were 298,000 job openings in construction at the end of August, 39% higher than the August 2017 total of 215,000, and the highest August total in the series' 18-year history, BLS reported on October 16 in its latest Job Openings and Labor Turnover Survey (JOLTS) release. The industry hired 360,000 employees in August, not seasonally adjusted, down from the August 2017 total of 401,000. Layoffs and discharges amounted to 2.0% of employees, the lowest August rate in JOLTS history. These figures, along with the positive September employment report and the recent AGC workforce survey, suggest contractors are still eager to hire more workers but are having difficulty finding ones who have construction experience.

            "The first year of new settlements [wages, benefits and other employment payments combined] agreed upon from January-September 2018 [2018-Q3] for union crafts in the construction industry...had an average increase of 3.0%," the Construction Labor Research Council reported last week. "...the average increase for the first year of settlements has slowly and steadily risen by over one percent[age point] since 2010/11 (from 1.7% in 2010 to 3.0% in 2018-Q3). The current average increase is still below the rates during the 2006-2008 timeframe, were which were well over 4.0%....Through September 2018, the data ranged from 2.9% for teamsters and plasterers to 4.5% for insulators."

            Dodge Data & Analytics released its 2019 Dodge Construction Outlook on Thursday. The report predicts that total U.S. construction starts for 2019 will stay "essentially even with the" estimate for 2018, which it predicts will be 3% higher than the 2017 total. "There are, of course, mounting headwinds affecting construction, namely rising interest rates and higher material costs, but for now these have been balanced by the stronger growth for the U.S. economy, some easing of bank lending standards, still healthy market fundamentals for commercial real estate, and greater state financing for school construction and enhanced federal funding for public works," stated chief economist Robert Murray. "...residential building will be down 2%, nonresidential building will match its 2018 amount, and nonbuilding construction will increase 3%." Dodge counts the full value of a project in the month it is deemed to start, unlike the Census Bureau, which measures the spending put in place each month. The Architecture Billings Index (ABI) topped the breakeven 50 mark for the 12th month in a row, with a seasonally adjusted score of 51.1 in September, down from 54.2 in August, the American Institute of Architects reported on Wednesday. The ABI measures the percentage of surveyed architecture firms that reported higher billings than a month earlier, less the percentage reporting lower billings; any score above 50, on a 0-100 scale, indicates an increase in billings. Scores (based on three-month moving averages) were above 50 for each practice specialty: institutional, 55.1 (up from 53.9 in August); multifamily residential, 54.9 (up from 54.3); mixed practice, 53.4 (up from 51.2); and commercial/industrial, 50.8 (nearly unchanged from 50.9).

            Register now for complimentary webinar on Thursday, Nov. 15, 2-3:30 pm EST: "Tariffs, Trade and Transition: Post-Election Design & Construction Outlook" with Chief Economists Ken Simonson (AGC), Kermit Baker (AIA) and Alex Carrick (ConstructConnect).



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