Construction Economic Report
Executive Summary – August 2024
Big Items
Real GDP: The 2nd quarter is in the rear view and the focus will now turn to projections for the third quarter. But before we put Q2 in the past, we can see what this did to expectations. The GDPNow data for the end of the quarter predicted 2.2% growth but the final numbers hit 2.8%. The first quarter’s slump to 1.4% was considered an anomaly. Most of that decline in Q1 can be attributed to a reduced level of government expenditure and that resumed to a significant degree in Q2. Now the assertion is that Q3 will end up close to 2.0% but expectations have been as high as 3.0% depending on what the consumer looks like in the next several weeks.
Raw Material Prices/Availability: There has been considerable volatility in the raw materials and commodity sectors – especially for the inputs important to the construction sector. Three factors have driven that volatility. The most vexing has been speculator interest. They anticipated a surge in demand as the global economy grew and invested heavily – driving prices up. Then that demand cooled and they tried to reduce their positions. The second issue has been the supply chain as it has been affected by the conflict in the Red Sea, Panama Canal drought issues and now the threat of a major strike affecting the US ports on the East Coast and Gulf Coast. Finally, there is uncertainty around interest rates and when big projects will gear up as financing costs shift.
Labor Situation / Labor Costs: The construction sector Employment Cost Index showed that overall labor costs are still high but have now retreated slightly. It is now at 161.2 in Q1 (latest available), down from 162.5 in Q1. More importantly, wages are still growing at a 4.3% annual rate. This is higher than the 3.6% in Q1 of 2022 but still historically high. The average prior to the pandemic was 2-3% annually and that means that wages are still growing at nearly twice the annual rate. There has been a reduction in job offers in construction and that reflects the slowdown in some projects but it also signals that companies are reluctant to keep posting for positions when there are so few qualified applicants.
Manufacturing: S&P Global data showed the USMCA markets all contracting through the end of July. The Canadian rail strike will push conditions in Canada further south for August, with a likely snap-back when the strike ends. Europe is still in contraction but the Asian markets are back in expansion territory. India was still the fastest growing market in the world. But in the US, new orders are sluggish, input prices are still high (raw materials, component parts, labor, and energy), and selling prices are facing some pressure. Global inventories more balanced than in prior quarters, the hope is that global activity will gain some pace and lift all sectors.
Risks
Geopolitics and Inflation: The crucial issue in the geopolitical arena is the ongoing threat to traffic in the Red Sea. The shipping industry has to reroute as they can’t get insurance. It has been impossible to defend the ships traversing the region. If the Iran-Israel conflict escalates there is a threat to the Strait of Hormuz that would interrupt oil shipments. Overall, the reaction of the oil sector has been muted with prices staying in the 70s.
Hurricane Season and Severe Storms: It is expected to be an active storm season in the US as the year goes on and that usually stimulates a significant increase in reconstruction activity. The construction sector hardly celebrates natural disasters, but the reality is that work has to be undertaken and fast. There is a large backlog of infrastructure activity that will be government funded. The question is what projects will get the go-ahead and that rests on US political developments. A GOP dominated Congress is more interested in traditional projects such as roads, bridges, ports etc. while Democrats are more geared towards alternative energy efforts.
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The CICPAC Quarterly Economic Report is published quarterly for the Construction Industry CPAs and Consultants. Its contents are solely for informational purposes and any use thereof or reliance thereon is at the sole and independent discretion and responsibility of the reader. While the information contained in this report is believed to be accurate as of the date of publication, CICPAC and the author disclaim all warranties, express or implied, as to its accuracy and completeness.