Construction industry optimism dims for 2012

The Carolinas AGC Construction Barometer, reflecting first quarter 2011, shows very little change in the construction industry in both North Carolina and South Carolina, according to the Carolinas Associated General Contractors.

The aggregate Barometer score declined a modest 0.8 percent on slightly stronger business conditions observed across the first three months of 2011, offset by falling contractor expectations about future business conditions and rising wholesale prices, according to the Carolinas Associated General Contractors.

Construction volume increased throughout the Carolinas for the first three months of 2011, surpassing contractors’ expectations for the quarter and leading to a slight increase in labor demand. Given the substantial contraction in the construction labor market during the last few years, contractors reported difficulty in hiring skilled workers because so many have migrated to other industries. At the same time, contractors reported rising labor costs, particularly in the employee benefits area.

The slight uptick in reported business conditions also impacted financial market trends and demand for heavy construction equipment, with rising loan approvals, rising heavy equipment purchases, and greater spending for construction materials and basic inventory. On the Barometer’s quantitative side, first quarter 2011 turned out to be a bit better in almost every business category than contractors projected at year-end 2010.

However, the first quarter’s business improvement isn’t carrying forward into the remaining months of 2011. In previous quarters, Barometer panelists had reported increased optimism for 2012 due to fewer contractors remaining in business and expectations of more work coming down the pipeline.

However, panelists now believe that 2012’s business conditions may be a bit worse. They’re expecting modestly diminished business activity, a lower rate of equipment and inventory purchases, reduced hiring activity, and weaker demand for long-term credit toward the end of 2011 and into the early months of 2012.

State vs. State: NC Comes Out a Bit Ahead
(NC – Up 0.2%; SC – Down 2.8% )

Both North and South Carolina contractors reported stronger-than-anticipated first quarter business conditions, but the trend toward higher industry activity was stronger in North Carolina than in South Carolina. The stronger business growth has a downside, however, as North Carolina contractors reported significantly higher materials prices than South Carolina contractors. The source of rising business activity also differed between the two states: North Carolina reported stronger private-sector growth and relatively constant highway and utility construction activity; South Carolina reported weaker private-sector activity, but stronger highway and utility spending.

For the coming year, Barometer panelists in both states reported weakening demand for labor, and a rising concern for the quality and availability of skilled labor—a trend likely to continue into 2012. While diminished business activity is expected in 2012 in both states, the trend is significantly stronger in South Carolina. In the more populous urban regions of North Carolina, contractors expect better conditions in the near future, while the smaller, less urban areas of South Carolina expect a stronger slow-down.

Interest rates remain at historically low levels in both states, while contractors in North Carolina reported slightly stronger demand for both short- and long-term financing. In contrast, South Carolina contractors are seeing relatively constant demand for credit, but reported that commercial bankers are becoming less accommodating in granting new contractor borrowing requests.

The Carolinas Associated General Contractors reports the following:

Regional Economic Highlights

Heartland NC: Just Like the Good ‘Ol Days, with One Minor Exception …
(Up 0.8%)

Business conditions in first quarter 2011 in the Heartland were exceptionally good, with reports of a jump in business activity, an even larger gain in planned hiring, and strong growth in short- and long-term financing activity. After experiencing several successive quarters of bad news, these results were refreshing. Unfortunately … Heartland panelists don’t expect the good times to last throughout 2011. The unexpected uptick occurred in response to several new private construction projects; therefore contractors see the uptick as the exception to current industry conditions rather than the rule. Still, advancing activity led to a sharp increase in labor demand, which led to difficulty in locating skilled labor. Another positive note was the sharp increase in the level of DOT spending in the Heartland for first quarter, which should lead to increased highway spending toward mid-year 2011. Although Heartland contractors have downwardly revised their expectations for growth in 2012, they aren’t as pessimistic as panelists in other regions of the Carolinas.

Eastern NC: Some Good News—Things Aren’t So Bad!
(ENC – Up 1.0%)

The Eastern NC region advanced one percent for the quarter on rising construction activity, stable equipment and materials costs, and rising contractor optimism regarding the shape of things to come. The only reported decline: a significantly reduced demand for new workers in spite of rising business optimism and strengthening business revenue. Only a modest wholesale price inflation was reported, and likewise, only a bit more pessimism concerning business activity into 2012 in the Eastern region.

Western NC: Deteriorating Expectations for 2012
(WNC – Down 7.6%)

Business conditions in the Western NC region differed substantially from those in other NC regions. While Western contractors reported only a slight drop in business activity for the early months of 2011, they also reported rapidly deteriorating business conditions, rising equipment and materials costs, falling industry spending, and much more pessimism concerning the year ahead. As a consequence, there’s a reduced demand for construction equipment and skilled labor, falling availability of both short- and long-term credit, and growing expectations that industry price inflation will continue throughout the remaining months of 2011.

Upstate SC: Business Confidence Falling
(USC – Down 2.9%)

Upstate SC panelists reported falling labor demand, moderately rising construction materials and equipment prices, and diminished optimism concerning industry conditions projected for 2012.  While there is a bright spot—private construction has risen in the region—it’s somewhat overshadowed by slightly falling highway spending. Labor market conditions seem significantly weaker than last quarter, with reports of greater difficulty in hiring skilled workers, rising labor costs, and an expectation that labor cost inflation will continue into 2012. Demand for heavy equipment and inventory purchases declined, a trend expected to continue throughout 2011.

Lowcountry SC: Stable Hiring Conditions, Wage Rates
(LSC – Down 2.4%)

Lowcountry contractors fared similarly with their Upstate neighbors by reporting moderately rising construction materials and equipment prices. Opposite the Upstate, the Lowcountry region saw falling private sector activity, but rising highway spending. Hiring conditions compared to last quarter remained unchanged, wage rates remained stable, and there was less conviction that costs will increase in the coming year. Although there’s an expectation among Lowcountry contractors that business activity will remain slow,  there’s a significantly more sanguine attitude about the year ahead than in the Upstate.