AGC Economist Reports on Construction Spending

In response to a recent Census Bureau report regarding new record rates for construction spending, Ken Simonson, chief economist for the Associated General Contractors of America (AGC), said the industry is experiencing strong, balanced growth. He also identified materials costs and availability as key areas of concern.
 
In February, spending was at a seasonally adjusted annual rate of $1.19 trillion, up 0.8 percent from January and 7.4 percent from February 2005. "Not only was the overall total up strongly from a year ago, but all major segments showed similar growth," Simonson commented. "For the first time since the 2001 recession, private nonresidential construction led the parade with a 9.6 percent increase from the year-ago pace. Private residential construction was 7.1 percent higher and public construction, 6 percent higher.
 
"The year-to-date, or two-month, totals actually provide a more meaningful comparison, given the extremely mild weather in January and more seasonal conditions in February," Simonson added. "On a two-month basis, there were several segments that showed exceptional growth. Shopping-center construction leaped 61 percent, after swelling nearly 40 percent in 2005 and 25 percent in 2004. Hospital construction grew 22 percent, while manufacturing and commercial-warehouse construction climbed 20 percent. The previously lackluster office segment was up 18 percent.
 
"Both single- and multi-family residential construction shot up 14 percent in the first two months of this year compared to the same span of 2005," Simonson noted. "Home sales may be weakening but builders still have a big enough backlog of unbuilt houses and condos that residential construction spending should hold up for a few more months.
 
"On the public side, there were double-digit increases for educational, sewage and waste disposal, amusement and recreation, public safety, and water-supply construction," Simonson said. "That reflects the upturn in state and local tax receipts, which will keep public construction spending pumped up all year.
 
"The biggest worries are materials costs and availability," Simonson concluded. "As AGC's latest Construction Inflation Alert documented, numerous materials are going up in price much faster than are consumer items or most producer costs. An agreement with Mexico to allow cement into the U.S. for a duty of $3 per metric ton instead of the previous $26 takes effect today, and that may provide limited relief for some regions. But I fear cement shortages will reappear this spring. And by fall, there may be shortages of liquid asphalt. Several refiners have announced they plan to curb asphalt production as they produce lower-sulfur diesel fuel."
 
The AGC represents more than 32,000 firms and 11,000 specialty-contracting firms. It is also associated with more than 13,000 service providers and suppliers through its nationwide network of chapters. For AGC's Construction Inflation Alert and more detailed information on the Mexican cement agreement, visit www.agc.org/economics.