Construction Barometer Cites Robust Industry Growth

Commercial Contractors Keep an Eye on Material Costs & Labor Shortage

Aug 11, 2006, 01:00 ET from Carolinas AGC

    CHARLOTTE, N.C., Aug. 11 /PRNewswire/ -- For 1st quarter 2006, the
 Carolinas AGC Construction Barometer(TM) remained virtually unchanged from
 2005 year-end. General strengthening across the Barometer's quantitative
 indicators (up 2.3%) was almost exactly offset by a general weakening
 across the qualitative indicators (down 3%).
     Strong business growth continued throughout the Carolinas. However, in
 a geographic split contractors in the most rapidly growing urban areas
 report they don't expect the present rate of growth to be sustainable into
 2007. In slower-growth regions of the Carolinas, contractors say they
 believe the current rate of industry expansion will likely continue into
     Big gains in the Barometer's Quantitative indicators include sharply
 stronger demand for labor, driving the Employment & Labor Trends segment up
 more than 5% for the second consecutive quarter. In most regions of the
 Carolinas, contractors report a reasonable supply of skilled labor, with
 the uptick in labor demand not affecting industry wage rates or the supply
 of qualified workers. While labor availability remained unchanged from
 levels observed in late 2005, financing availability advanced 2.3% in early
 2006 on modestly stronger construction loan approval rates. While
 short-term interest rates continued to rise throughout the quarter,
 contractors noted that long- term rates remained favorable, while lenders
 remained receptive to both.
     Also on the Barometer's quantitative side, the Business & Economic
 Trends segment fell 1%, driven mostly by increased materials prices and
 uncertainty regarding inflation. Material cost represents the greatest
 business concern, with virtually all other quantitative indicators tracked
 by the Barometer pointing upward. It's noteworthy that most every segment
 of the construction industry is expected to continue growing strongly
 throughout 2006 and into 2007, including private construction (up 3.9%),
 highway and utility (up 2%). Given these healthy projections for stable and
 diversified industry expansion, Carolinas contractors are presently working
 to expand their businesses with 1) increased long-term borrowing, 2)
 increased heavy equipment purchases, and 3) significantly increased hiring
 plans for skilled construction labor.
     On the Barometer's qualitative side, strong growth was more than offset
 by substantial contractor concern over rising construction materials
 prices, a looming shortage of skilled labor, and (in the rapidly growing
 urban areas of the Carolinas) increased sentiment that the present rate of
 industry expansion will not be sustainable into 2007. The good news is that
 material cost increases are expected to abate in coming months. Panelists
 also anticipate much more manageable -- and predictable -- materials cost
 inflation in 2007. This good news is offset somewhat by increasing
 contractor concerns regarding a potential skilled labor shortage likely to
 develop in 3rd quarter 2006. For the present, however, sharply stronger
 demand for labor is accompanied by only modestly tighter labor market
 conditions, and only in the most rapidly growing regions of the Carolinas.
     Looking ahead, contractors are increasingly confident that the material
 cost inflation will subside, industry growth will continue at a slightly
 more manageable pace throughout the year, and the principal problem
 confronting contractors will involve recruiting and retaining a sufficient
 quantity of skilled workers.
     State vs. State Comparison: Rapid Growth in NC Leads to Greater
 Materials and Equipment Cost Increases (NC down 0.7%; SC down 0.2%)
     Barometer scores in both Carolinas fell modestly in 1st quarter 2006,
 but for quite different reasons. In North Carolina, the primary reason for
 the drop was a significant decline in the Barometer's Business & Economic
 indicators on the qualitative side of the index, while in South Carolina
 the primary reason was an 18.3% drop in Employment & Labor Market trends
 reported by industry suppliers and architects. Interestingly, the perceived
 deterioration in SC's labor market conditions reported by suppliers and
 architects was not reported by contractors. SC contractors noted that
 employment and labor market conditions remained largely unchanged from 4th
 quarter 2005.
     NC's big drop in Business & Economic Trends was attributable to greater
 rates of construction materials and equipment cost increases than SC
 contractors reported. NC's increased materials cost inflation may be
 related to stronger across-the-board demand for construction supplies. NC
 contractors reported significantly stronger demand for labor (up 28.6%),
 while SC contractors reported a much slower rate of growth in construction
 industry positions (up 7.1%). NC contractors also reported a 10% increase
 in new commercial loan approvals, while SC's loan approval rates were
 unchanged from year-end 2005.
     Regional Economic Highlights
     Heartland NC: Activity Jump Leads to Material Cost Inflation and Labor
 Demand (Down 1.0%)
     In early 2006, the Heartland NC region experienced the state's greatest
 rate of commercial construction activity; however, contractors report that
 this strong rate of expansion is simply not sustainable throughout 2006.
 While construction activity is expected to continue growing for the
 remainder of 2006 and into 2007, the rate of industry expansion is expected
 to cool with the weather.
     The I-85 corridor's large jump in construction project announcements
 triggered sharply stronger demand for labor, as Heartland contractors
 reported a 10% rise in new positions. At the same time, contractors
 reported that the substantial uptick in commercial building activity has
 placed increased stress on construction material supply chains, material
 availability, and material inflation rates, which will likely continue
 through 2006.
     Eastern NC: Industry Growth Cools (Up 0.3%)
     For Eastern NC, the Barometer increased a slight 0.3% on a surge in new
 private and DOT spending that caused business activity to advance 6.4%. At
 the same time, Eastern contractors report a slight drop in expectations
 that materials and equipment prices would continue rising. Increased
 industry price stability in the East may be related to contractor
 expectations that the rate of industry expansion enjoyed in early 2006 will
 not continue into 2007. There's a perception that new project activity will
 slow toward the end of 2006, and construction revenue will grow at a
 slower, more manageable pace in 2007. Contractors report far less tension
 in the regional labor market, including stable wage rates.
     Western NC: Industry Growth to Accelerate (Down 0.9%)
     In Western NC, expectations for future construction project growth are
 far different than down East. Western region panelists report strong
 business growth in early 2006, with continued growth throughout the year
 and into early 2007. As a consequence, there are rising expectations that
 construction equipment and material prices will continue rising at least
 through early 2007, with the fear that a sustained uptick in business
 activity will lead to a shortage of skilled workers, rising construction
 wage rates, and increased difficulty recruiting and retaining high quality
     Upstate and Lowcountry SC: Mirror Images
     (Upstate down 0.5%; Lowcountry up 0.4%)
     Interestingly, commercial construction business conditions across South
 Carolina are almost mirror images of one another in early 2006, with the
 Upstate Barometer score down by just about the same magnitude that the
 Lowcountry Barometer increased. Even more surprising, the very Barometer
 component scores leading the higher Barometer value in the Lowcountry are
 the same components leading to the Barometer's drop in the Upstate.
     Lowcountry contractors report a slight increase in overall construction
 costs, and expect these to continue into 2007. In the Upstate, contractors
 report a decrease in overall construction costs, and expect this
 deflationary trend to continue. Lowcountry contractors reported that labor
 costs had fallen modestly in early 2006, and once again, they expected this
 trend to continue for the remaining months of 2006 and into early 2007.
 Upstate contractors report a slight increase in skilled labor costs that is
 expected to continue for the remainder of the year.
     Both SC regions agree on one aspect of the state's construction
 industry: a moderately stronger growth in 2007.
     For a more detailed look at the Carolinas AGC Construction
 Barometer(TM) results for Quarter 1, 2006 visit, Construction
 Market Stats. To participate as a Construction Barometer panelist, contact
 Lori Tharp at 704/372-1450 ext. 5227 or

SOURCE Carolinas AGC