Nonresidential construction starts fall 19.5% during July as builder outlook shrinks due to increased labor, materials costs

Updated Aug 21, 2014
U.S. nonresidential construction starts. (12-month moving averages) Credit: Reed Construction DataU.S. nonresidential construction starts. (12-month moving averages) Credit: Reed Construction Data

Following an “exceptionally strong” June, the dollar value of nonresidential construction starts fell 19.5 percent during July, according to data gathered by Reed Construction Data.

“A surge of project authorizations at the beginning of summer has been followed by a significant retreat,” says Reed chief economist Alex Carrick. “The latest month was a return to equilibrium as established over the past several years.”

The value of nonresidential starts fell from $32.4 billion in June to $26.1 billion in July, according to Carrick. Despite the fall, Carrick says July’s volume remains the second-highest volume of the year and is 1.4 percent above July 2013’s mark.

So far this year, Carrick says the value of nonresidential construction starts through July is $164.853 billion, an improvement of 4.8 percent over the same period in 2013. It should be noted, Reed states its figures in “current” dollars which means they’re not adjusted for inflation.

FMI’s Nonresidential Construction IndexFMI’s Nonresidential Construction Index

Carrick says the numbers point to an economy “on a growth path that is not being mirrored in construction starts.”

“The level of pent-up demand for construction continues to accumulate,” Carrick says. “Non-residential building starts are no higher now than they were eight to 10 years ago. Nor are infrastructure needs being met for a population that is growing at an annual pace of 0.7 percent to 0.8 percent.”

You can view Reed’s full data set covering the value of starts for each segment of nonresidential construction below.

Meanwhile, the outlook of nonresidential construction firm executives remains positive but dropped slightly during the last fiscal quarter.

Investment banking and research firm FMI released its third quarter Nonresidential Construction Index which showed a drop of 3.3 points to a score of 62.5. The index rates panelists’ responses with any score above 50 indicating these executives anticipate expansion or improvement in the market while any score below 50 indicates they anticipate contraction or worsening.

FMI says the two components of the index that most influenced its drop this quarter were the rising cost of materials and a “strong” increase in the cost of labor. Panelists’ responses to the cost of construction materials scored a 17.2 on the index while cost of labor came in at a 12.9. Again, any score below a 50 indicates anticipation of the situation worsening.

However, as the FMI report points out, despite the fact that increased labor and materials costs make it harder for these firms to improve profit margins, the increase of these costs also indicate the fact that “business is improving to the point where material and labor can command higher prices and wages.”

nonresidential construction value