Construction spending unchanged in July; Katrina to affect material costs, supply

Construction activity through July showed widespread improvement compared to the first seven months of 2004, but the devastation wrought by Hurricane Katrina will have varied impacts on construction markets for the rest of 2005 and into 2006, according to Ken Simonson, chief economist of the Associated General Contractors of America.

Private residential construction climbed 12 percent year-to-date, private nonresidential construction was up 5.3 percent and public construction increased 5.8 percent. According to a report the Census Bureau released Sept. 1, the value of construction put in place in July was $1.1 trillion at a seasonally adjusted annual rate. The total was unchanged from June’s figure.

Simonson, however, says the year-to-date statistics may overstate real growth because the cost of cement, steel, copper, gypsum and petroleum-based inputs are on the rise.

“Unfortunately, Katrina will push many of these costs much higher,” Simonson said. “Contractors use a lot of diesel fuel for off-road equipment, their own trucks and the multitude of deliveries of materials and equipment. Petroleum or natural gas is a key ingredient in asphalt, roofing materials, plastic pipe and insulation. And energy costs are built into the price of mining, milling, making, molding and transporting metals, concrete and most other construction materials.”

The storm will affect the supply of materials as well as demand. The areas affected by the storm have a significant number of wood product facilities that may have been damaged or destroyed, according to a report by economists for the National Association of Home Builders. On the other hand, trees that have been blown down will need to be harvested on an accelerated basis, perhaps helping to lower wood product prices in the medium term.

The NAHB study also points out imports of building materials will be disrupted by damage to port facilities. New Orleans was the top destination for imports of cement and a number of other building materials into the United States in 2004, according to NAHB.

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“Cement was already in short supply in 32 states and the District of Columbia last month,” Simonson said. “The disruption to ocean, barge and rail transport from Katrina, and the loss of power to cement plants in the storm’s path, will cut further into cement supplies. At the same time, the urgent need to stabilize and rebuild roads, other infrastructure and buildings will increase demand for cement and other materials.”

The full extent of the impact of Hurricane Katrina on the overall economy and on the housing market is still unclear, but the NAHB economists say the number of homes destroyed by the catastrophe is almost certain to dwarf losses from any previous U.S. natural disaster.

Although the loss of tens of thousands of homes implies increased demand for, and construction of, new homes, the NAHB report says past experience shows there is no massive surge in home building in hurricane-affected areas. That’s because the immediate need to clean up and repair damaged structures will absorb much of the construction labor and materials that would otherwise have been used to build new homes.
— Jonathan Menard