Construction Stabilizes; Recovery Not In Immediate Sight

Oct 05, 2009, 07:00 ET from Carolinas AGC

Carolinas AGC Construction Barometer (TM)

CHARLOTTE, N.C., Oct. 5 /PRNewswire-USNewswire/ -- For second quarter 2009, the Carolinas AGC Construction Barometer(TM) dropped a mere 1.1%. While it's very likely we've bottomed-out in the economic recession, we seem to be riding along the bottom of the business cycle with little forward momentum.

To ensure an accurate and objective assessment of the state of the Carolinas commercial construction industry each quarter, the Barometer captures data in three broad categories, compiling nearly 4,000 pieces of data each quarter. For 2nd quarter 2009, virtually nothing important changed in all the 4,000 data. What does that mean? There's virtually no significant sign of real recovery yet in the Barometer's Q2 report; likely, it will be at least mid-2010 before the construction industry attains sustainable momentum.

The Barometer's modest decline was virtually all due to a weakening financial market for contractors. While the national financial press reports that business credit is once again available; Carolinas contractors reported some of the most difficult credit market conditions ever. If Barometer panelists are correct in their assessment, the credit crunch is likely to get worse late in 2009 and into the early months of 2010. Panelists reported a slowing volume of loan approvals, tighter loan evaluation standards, and a general expectation that virtually all types of contractor-related borrowing requests--including short-term working capital loans, long-term equipment finance arrangements, commercial real estate financing, and project development loans--will be more rigorously evaluated by lenders over the next few years.

However, there was a positive sign of improvement in the labor market. The downward trend in construction positions anticipated for 2010 is slowing from levels observed earlier in 2009; while it's still negative, the magnitude of change from quarter to quarter is slowing significantly. Contractors also reported a small uptick in second quarter business activity, pushing the Business & Economic Trends segment up by 3.7% (likely helped by warm weather).

State vs. State: NC Fares Slightly Better than SC

(NC - Down 0.9%; SC - Down 1.5%)

Both Carolinas experienced a modest drop for Q2, 2009, although the 1.5% drop in South Carolina was somewhat more pronounced than North Carolina's 0.9% drop. This was primarily attributable to a larger contraction in business activity and a sharply deteriorating financial market in South Carolina. While both states reported slightly increased construction activity from the previous quarter, both continued to see decreased year-over-year activity, slowing new project work, and limited credit availability.

While North Carolina contractors reported credit becoming increasingly expensive, contractors in South Carolina reported a virtual absence of commercial credit altogether. Labor market conditions in both states remained generally similar, with continuing low demand for workers, decreased new positions, and plentiful skilled workers. North Carolina contractors reported a drop in new positions for the seasonal construction season (an unusual occurrence), while South Carolina contractors reported almost no change from first quarter. Finally, contractors in both states reported stable materials costs but inflated equipment costs, which they anticipate will become more stable toward the end of 2009.

Regional Economic Highlights

Heartland NC: Optimism Continues in the Heartland (Down 0.9%)

The modest optimism regarding future business conditions continued into Q2, although the region's Barometer score dipped by 0.9% on significantly lower demand for labor. However, Heartland contractors reported rising business activity and a belief that the worst of the industry downturn is behind them. For the coming year, contractors expect modestly stronger construction activity as well as a generally improving business climate.

These expectations seem to be shared with business lenders in the region, as credit shortages reported by contractors elsewhere in the Carolinas do not seem to be a problem in the Heartland. Financing availability remained essentially unchanged from first quarter. Contractors reported little appetite for new debt, as both materials purchases and forecasted equipment expenditures trended lower during the quarter. Paradoxically, contractors reported slightly higher construction equipment prices in the region, while materials and labor costs either remained constant or continued their trend downward from earlier in the year.

Eastern & Western NC: Activity Up in the East; Expectations Improve in the West

(ENC - Down 1.8%; WNC - Up 3.8%)

In spite of a rising Barometer score in Western North Carolina, general business conditions in the region continue to be difficult. However, contractors reported rising expectations that 2010 will bring some economic improvement to the Western region. In the Eastern part of the state, contractors reported some relief in the form of modestly stronger construction activity, but reported increasing pessimism about the shape of things to come in the construction industry.

The Eastern region's labor market showed modest signs of life in the spring months, while hiring plans in the Western region remained unchanged from previous quarter. The absence of a downward revision in the number of anticipated new positions in the West broke the trend of progressively lower labor demand experienced over the past two years. Neither region reported any increased demand for heavy equipment purchases; both reported constant-to-falling equipment and materials prices. Eastern contractors reported slightly better availability of credit attached to significantly higher interest rates, while Western contractors reported less availability of credit,

also at elevated rates.

South Carolina: Business Down in Upstate; Credit Dry in Lowcountry

(USC - Down 0.8%; LSC - Down 3.1%)

Both South Carolina Barometer regions experienced a downturn in Q2, but the change in the Upstate was milder (down 0.8%) than in the Lowcountry (down 3.1%). In the Upstate, the Barometer dropped due to a weakening demand for labor, a diminished appetite for new workers, and a growing belief that business will continue slowing in the remaining months of 2009.

Lowcountry contractors reported no significant change in business activity or in demand for new construction workers. They did report, however, a sharp drop in the availability of credit to meet short-term working capital needs within the region. Both the cost and availability of short-term credit reflected a negative trend for the quarter, with financing costs up sharply and credit availability down at the same time.

In the Upstate, contractors noted a drop in the availability of working capital financing, but this drop wasn't accompanied by a noticeable increase in borrowing costs. Like other Carolina regions, contractors throughout South Carolina reported stable labor and equipment costs and falling materials costs through the first six months of 2009.

For a more detailed look at the Carolinas AGC Construction Barometer(TM) results for Quarter 2, 2009 visit, Construction Market Stats. To participate as a Construction Barometer panelist contact Lori Tharp at 704/372-1450 ext. 5227 or

SOURCE Carolinas AGC