Hold On A Bit Longer; Another Difficult Year Ahead

Jan 27, 2010, 08:00 ET from Carolinas Associated General Contractors

Carolinas AGC Construction Barometer(TM)

CHARLOTTE, N.C., Jan. 27 /PRNewswire/ -- For third quarter 2009, the Carolinas AGC Construction Barometer™ showed very little change from second quarter, down 0.9%. While the overall quantitative index rose a scant 0.8%, qualitative indicators such as business and credit conditions continued to worsen and dropped 2.7%. Hard data indicate the economy has bottomed-out, while contractor perceptions remain pessimistic.

The only real bright spot lies within the construction operating cost arena, where  nearly every category showed stability or a modest level of deflation. Materials, equipment, and labor costs all continue to decline, and for most expense categories (including petroleum products) this trend is expected to continue well into 2010.

The industry's unemployment rate remained virtually unchanged, and a plentiful supply of skilled labor was reported. One modest bright spot for 2010: a slight increase in new positions anticipated in NC's region, where contractor panelists report a slight uptick in hiring plans for spring. This moderate increase in labor demand represents an early indicator that the worst may be over for the Carolinas' strongest commercial construction firms.

Business indicators showed almost no change in volume from second quarter. The stress of the recession shows as highway and utility spending dipped in the third quarter, and contractors expect an even deeper drop in coming months. And, it's not surprising that contractor demand for heavy equipment purchases declined again.

Financial conditions continue to be a major impediment, with almost no new money flowing into development projects, short-term working capital facilities, or equipment loans. Interest rates and contractor borrowing costs remain at record low levels, yet new loan applications and approvals remain extremely low. The absence of credit is expected to continue well into 2010, severely limiting the industry's ability rebound.

We'll emerge from the coming year with fewer contractors in business, as weaker firms are consolidated away or forced into bankruptcy. But, by the closing months of 2010 we'll likely see construction business conditions start to improve. Growth in construction activity will return in early 2011, and we'll start to see an uptick in hiring, greater demand for heavy equipment purchases, and easier credit  conditions. But hold on -- we've still got a difficult year to go!

State vs. State: Both States Down, Reasons Differ

(NC - Down 0.8%; SC - Down 0.9% )

While conditions deteriorated in both states, the drop in North Carolina was much more pronounced. The NC drop in business was offset by easier labor market conditions, while SC's business decline was met by virtually no change to the state's construction labor market.

The boost in NC labor conditions was entirely attributable to strengthening plans for hiring new workers in the Heartland region; the two other NC regions, and similarly, both South Carolina regions, reported no change in planned hiring for 2010. NC wage rates dipped, but are expected to rise again in early 2010. SC contractors reported no drop for quarter three and don't expect any in the near future.

NC contractors reported a significant tightening of commercial credit, although financing costs remain unchanged from earlier in 2009. SC contractors reported exactly the opposite: rising financing costs while credit availability remained more stable. However, SC contractors anticipate tighter credit conditions and higher borrowing costs.

Regional Economic Highlights

Heartland NC: A Paradox

(Down 0.5%)

Barometer results in the Heartland for third quarter were somewhat paradoxical, with rising demand for labor and slowing business activity occurring at the same time -- likely due to the reportedly lower construction wage rates in that region. However, Barometer panelists reported sharply slower construction activity and diminished expectations for improvement in 2010. Consistent with sagging demand, construction materials and equipment costs remained stable.

Sharply lower availability of credit was reported, particularly in the short-term working capital area. Equipment financing availability also turned downward for the quarter, but the drop here was smaller than in the working capital sector. The problem is with the lack of availability of money and bankers' limited willingness to lend it, rather than the cost of borrowing.

Eastern NC: A Tough Borrowing Market

(Down 2.0%)

The Eastern region of NC experienced a big drop in activity in third quarter, accompanied by sharply lower contractor expectations for improvement in 2010. While private construction continued to weaken, public works spending remained constant, as did the expectation that highway and utility spending in 2010 will match 2009 levels. Eastern contractors also face increasingly difficult credit market conditions; the trend of stable interest rates combined with increasingly limited availability of working capital financing found in the Heartland mirrored Eastern conditions. There's an expectation that borrowing costs are likely to rise in the coming year, along with an increase in interest rates.

Western NC: Highway Spending Drops (Down 1.1%)

Western contractors reported slower activity for the quarter, but expectations for business growth in 2010 remained unchanged from projections given earlier in the year. The drop in business activity in the West was attributable to falling highway and utility spending, with a greater fall in public spending expected in 2010. Contractors noted stable borrowing costs, stable credit availability, and a constant level of new loan requests for third quarter.

Upstate SC: Conditions Deteriorate (Down 1.9%)

The Upstate SC region felt the squeeze of falling construction activity, difficult financing conditions, and growing pessimism about 2010 conditions. Some fear the new year will be worse than 2009. It's no surprise the employment market remained soft, and virtually all construction costs -- including labor, heavy equipment and materials costs -- were stable throughout the quarter. This trend is expected to continue well into 2010.  

Lowcountry SC: Cheers to Improved Conditions (Up 1.8%)

The Lowcountry SC region showed markedly different business trends in third quarter than the Upstate. Gains were reported in both financing availability and business activity, and contractor optimism increased in regard to construction activity. The biggest gain occurred in response to an increase in available financing, with short-term working capital significantly more plentiful than in second quarter. Contractors also anticipate that the easier credit conditions in the Lowcountry will persist well into 2010, countering the trend observed elsewhere in both states. The employment market and construction costs both remained rather soft, a trend likely to continue into 2010.

Carolinas AGC builds its 2,800 members' businesses through workforce development, business development, profit management, and workers' compensation insurance. More than 75% of commercial and industrial construction (buildings, highways/bridges, utility facilities) in both North and South Carolina is performed or supported by CAGC members.

For additional information or names of local Barometer panelists contact:

Lori Tharp, Carolinas AGC (704) 372-1450, ext. 5227

ltharp@carolinasagc.org; www.cagc.org

SOURCE Carolinas Associated General Contractors