BuildingTeam Construction Forecast

Notes from Jim Haughey

Reed Construction Data Chief Economist Jim Haughey discusses how current developments in construction markets and the ecomony will bring opportunities and challenges for designers, contractors, and materials and services providers. His reports will cover near-term building demand, cost and financing changes, and will provide early notice on changes in the detailed two-year construction forecasts elsewhere on this site. Feedback and questions from readers are encouraged.

Friday, September 7, 2007

August Job Shock Dims Economic and Construction Outlook

Sep 7 2007 12:18PM | Permalink | Email this | Comments (0) |
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The 4,000 job loss reported for August is bad news for the next year, whether it is sustained in the next Jobs report on October 5th or revised away. It is never a good bet to assume a substantial revision that changes initially reported trends. That said, the August job loss was totally unexpected. All of the tracking models for the month to month job change expected 100,000 plus new jobs. The job indexes from, ADP (payroll services) and Manpower (temporary help agency) all suggested somewhat weaker job growth but no hint of an outright decline.

Reed Construction Data will mark down both the economic and construction forecasts for the balance of this year and 2008. Details will be posted on this site in a few days. GDP growth will likely sink to 1-2% in the second half of the year before gradually rising back to the 3% sustainable trend at the end of 2008.

Residential construction will be hit first and hardest. 23,000 jobs were lost in August. More months of double digit job loses should be expected. There will be spillover to nonresidential building construction within a few months, unless the August loss is revised away. 5,000 jobs were added here in August but a long string of monthly job increases is likely to end later this year. However, the job cuts will be much less severe than in the residential market. Commercial projects will feel the impact quicker and harder than institutional projects that are driven by funds raised in an earlier, stronger economy and are less sensitive to current economic conditions. The impact will be last and least on heavy construction where project lifecycles are longer and funding is largely insensitive to current financial conditions.

The word "recession" will now be often in the news but that seems premature now. The risk of a recession is higher, moving up from the recent 10-15% risk. The heightened caution about spending will spread job losses from housing and motor vehicles to the broader economy. The August jobs report included monthly job losses of 46,000 in manufacturing, 32,000 in K-12 schools and 20,100 in temporary help services. Two of these are all suspect. Manufacturing activity has been improving lately. The education job cuts could be a seasonal adjustment problem; it would not be the first time. Employment was steady in both finance and real estate after several years of aggressive hiring.

Be careful about becoming too pessimistic. There are still many strong growth drivers in the economy. Nonresidential building remains strong. Architectural and engineering service firms added 2,400 jobs in August. The strong remodeling market may be behind the 12,500 jobs added in August by building and garden supply retailers. Although there is a 2-3 quarter lag, the impact of the now weaker dollar and cheaper credit costs has a powerful impact on spending.

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