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Tags: Housing | Construction | economy | building

It’s Not Just Housing Construction That’s Down

By    |   Thursday, 19 April 2012 12:15 PM

I love construction. If you wanted keep a younger Bob Wiedemer happy, just drop him off at a big construction site and he could watch for hours. It also works on an older Bob Wiedemer, but I like to move from site to site now — made much easier by having a driver’s license!

So, it’s no surprise that I focus a bit more on construction than other financial analysts.

But, it’s economic importance is huge in three ways:

1) It is a major part of our economy;

2) It drives the purchase of a lot of US manufactured goods; and

3) It is a rough, but very solid indicator of fundamental growth in the economy. In fact, in many parts of the country it was the dominant industry.

Growing up in Houston in the 1970s, it was the biggest industry, not oil and gas. More recently in states like Florida, Nevada, Arizona and California it was a very large part of their economies.

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As we know the collapse of the housing construction bubble in those states and around the country is a big part of the reason that the economy has suffered so much. The fact that housing construction has not recovered to anything like previous levels is a major reason for the lack of any major economic recovery.

But, it isn’t just housing construction, that’s down. The rest of the construction industry is suffering as well.

Let me introduce you to a good indicator of construction that tells the story.

It’s the Dodge Construction Index published by McGraw Hill. It looks at construction starts of all kinds on a monthly basis — residential construction, commercial building construction, road construction, airport construction, manufacturing plant construction, solar power plant construction — you name it and they track it.

In February of this year the Index hit an all-time low of 80. An index of 100 was equal to the level of construction in the year 2000. It peaked at around 160 in 2007. Equally telling is that it has declined significantly every month since October.

This Index is highly volatile because it is not adjusted. It just adds up the value of all the projects started in a given month to derive the index. Big construction projects such as a multi-billion power plant will affect the monthly numbers.

That’s also what I like about the index. It correlates to actual projects. They even discuss some of the projects specifically in their monthly report — a new high school in Dallas, a new apartment building in Santa Monica, a new solar power plant in Arizona, etc. That way you get a real feel for what is being built and where it’s being built. It’s not just a dry statistic. That helps me in determining the sustainability of the construction trends.

The latest chart is shown below and you can see the volatility — movements over a few months clearly do not make a trend. But you can still see the unmistakable trends over longer periods of time.

The report also breaks down construction into categories and tells you how each has performed. This is where you can see how non-housing construction is performing. I have excerpted a part of their most recent report available on their web site below. I suggest you go to the website to read the full report this month and periodically in the future. It comes out around the 25th of each month. The site is appropriately named www.construction.com.

The 14 percent decline reported for total construction on an unadjusted basis during the first two months of 2012, compared to 2011, was the result of a mixed performance by major sector. Nonresidential building dropped 17 percent year-to-date, reflecting this pattern – commercial building, down 9 percent; institutional building, down 15 percent; and manufacturing building, down 54 percent. Residential building climbed 20 percent year-to-date, with multifamily housing up 23 percent while single family housing grew 20 percent from its very weak amount at the start of last year. Nonbuilding construction fell 33 percent year-to-date, due to a 20 percent retreat for public works and a 56 percent reduction for electric utilities. The size of the year-to-date decline for nonbuilding construction was affected by the comparison to elevated activity during the first two months of 2011, which included such large projects as a $2.5 billion solar power facility in California and $2.1 billion for work on the LBJ Freeway in Dallas TX.

Note that they are comparing apples to apples. They compare January and February 2012 with January and February 2011. I like non-seasonally adjusted year to year comparisons in economic statistics. It gives me a good feel for real changes and I don’t have to worry about whether they are doing their seasonal corrections correctly.

The other key as I mentioned earlier is that they break the statistics down into specific construction categories. In the full report they break it down further into, hotels, hospitals, etc. — whatever was important that month.

Also notice that they very specifically note why there were big changes in the year on year comparisons for a given category — the solar power plant and LBJ freeway work in 2011.

Although there is a lot of volatility in any given month, you can see that housing is actually the bright spot. The rest of the construction sector is suffering badly.

Although these declines are larger than normal in the past couple months, I can tell you that it is reflective of a general trend of lower construction of all types over the past few years. One exception last year was electric utilities which had record construction due to federal subsidies for solar and wind power that expired at the end of 2011.

Again, the lack of any recovery in construction is important because it is a big part of the reason the U.S. economy is still struggling. And it doesn’t just reflect problems in the construction industry; it also affects a lot of US manufactured goods as well. Perhaps most importantly, it reflects a lack of growth in the economy.

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If you aren’t building more retail space, you probably aren’t going to see lots of hires in retail. If you don’t see a lot of hotels being built, don’t expect the hotel industry to be hiring a lot of people. Sure, you can still get some ups and downs in hiring without construction, but fundamentally over the longer term, the lack of construction tells you that hiring is and will be slow. The lack of construction is partly due to tighter credit but it is also due to lack of demand. And, that tighter credit is tighter only in comparison to the very loose credit of the housing bubble days. It probably shouldn’t (and won’t) loosen up that much.

The Dodge Index also mirrors what I see when I am traveling. I was in California a few weeks ago and drove from Santa Barbara to Newport Beach. It’s a 120 mile drive through the heart of LA and an area that has since massive amounts of construction over the past 30 years. I have driven parts of it many times and always seen a lot of construction.

However, this time was highly unusual. I only saw one major project, which was a shopping center. There were also a few smaller projects and, since I landed at LAX, I saw they were building a new terminal there, so that counts as a second big project.

But, that’s it. I was shocked. And, it’s not only LA; construction is way down in other areas. South Florida, needless to say, but also areas that are still showing good growth, such as Dallas, aren’t showing anything like the level of construction they had over the past 30 years. Cities that are doing OK, such as Atlanta and Minneapolis, are also seeing much, much less construction than they had in the past.

The huge slowdown in construction is a big issue and one to watch in the future. Construction starts are a lagging indicator so it lags behind economic growth. It can take years to get construction projects going. The flip side is that there is also a lot of momentum from earlier construction projects that takes time to slow down.

My suspicion is that construction will not rebound soon and it may even go down this year and next. There are a number of reasons for that even outside of an Aftershock occurring, which I would like to discuss, but this blog has already gone well over the normal size limit.

As you can tell, for me construction is a fascinating industry and it’s one of those fundamental indicators of economic activity that I trust to show me the real health of the economy.

About the Author: Robert Wiedemer
Robert Wiedemer is a managing director of Absolute Investment Management, an investment-advisory firm for individuals with more than $200 million under management. He is a regular contributor to Financial Intelligence Report, the flagship investment newsletter of Newsmax Media. Click Here to read more of his articles. Discover more about his latest book, "Aftershock," by Clicking Here Now.

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Thursday, 19 April 2012 12:15 PM
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