Regional Report: US slowdown?
15 April 2008
One of the few problem areas of the world economy over the last year has been the US housing market. Last summer's downturn, while not massive, has been taken by many as a worrying sign that the world's largest economy could be heading for a recession.
But while much has been written on this subject in the world's media, what actually happened last year?
According to the US Census Bureau, the value of residential construction put in place in 2006 was US$ 639 billion, a -1.7% fall from the US$ 650 billion worth of homes built in 2005. This was not a massive fall in itself, but the concern is that this might be the start of a more serious problem.
It was also significant in terms of the wider US economy. US GDP last year was around US$ 13220 billion, so at US$ 639 billion the residential construction market accounts for about 5% of all US economic activity. Obviously a potential downturn in such a large sector has implications for the whole economy.
Indeed, last year's US$ 11 billion fall in residential constructio knocked about -0.1% of US economic growth. It may not sound like a lot, but when more than +3% GDP growth is seen as good, and +5% or more represents a boom, a -0.1% drop has an impact.
But while the residential market stuttered in 2006, nonresidential construction enjoyed its best year this decade. This sub-sector of the industry grew +13.4% according to Census Bureau figures, with the value of construction put in place hitting US$ 559 billion.
So although the non-residential sector was smaller than residential last year, its growth was more than enough to offset the decline in house building. Overall, total construction put in place grew +4.8% in 2006 for a total of US$ 1198 billion.
Another interesting distinction the Census Bureau makes is between publicly and privately-funded construction. The private sector is by far the larger at US$ 929 billion - 77.5% of the total market, compared to US$ 269 billion, or 22.5% of the US total, for public works. However, at +10.1%, growth in public sector construction was much stronger than the +3.3% rise seen in the private market.
As far as the public sector is concerned, this was the highest rate of year-on-year growth seen since 2001. In stark contrast, private sector growth was at its weakest since 2002. There was a similar pattern in terms of residential vs. non-residential construction, with the residential market at its weakest for three years, while the non-residential sector is seeing its strongest growth this cycle.
Little surprise then that the best bits of the industry to be involved in last year were publicly-funded non-residential construction projects. In general, the various infrastructure sub-sectors did best, with segments like office construction and construction related to education, health and so on seeing lacklustre growth.
In the infrastructure sector, highway and street construction, which at US$ 75 billion claims the largest slice of the US public construction budget, grew +14.8%. This rise was undoubtedly linked to the signing in 2005 of the new Transport Equity Act (TEA), which belatedly superseded the original 1998 legislation covering the 1998 to 2003 period. The new bill will see US$ 286.4 billion spent on transport infrastructure - excluding air travel - up to 2010, an average of US$ 57.3 billion per year.
In other infrastructure areas, construction relating to other types of transportation was up +8.5% to US$ 21 billion, while the water and sewage sector rose +14.0% to US$ 31 billion. Interestingly though, publicly-funded construction in the power sector fell -6.6% to US$ 7.5 billion.
But while the US construction market has rocketed over the last three to four years, so have prices for materials. According to the 2007 Construction Inflation Alert by the Associated General Contractors of America (AGC), despite the slowdown in residential building the Producer Price Index (PPI) for construction materials and components grew +4.3% last year, well ahead of the +2.5% rise in consumer prices.
According to the AGC, the cost of construction products has leapt +22% in the last three years, compared to just a +9% rise in consumer prices. So although still well above headline in. ation in the US, this figure of a +4.3% annual rise represents a slowdown from the +6.1% increase in 2005, and the massive +10.1% rise in the cost of construction materials seen in 2004.
The main contributor to this rise seems to have been steel, with the cost of structural steel rising +53.8% in 2004. Clearly the huge rise in global metal prices that year had an e. ect across the industry, with the cost of almost any metallic construction materials, from aluminium pro. les, to copper plumbing products and even ornamental ironwork, shooting up in 2004.
Aplthough price rises for these were not as pronounced in 2005, other areas, particularly cement, concrete and gypsum products saw a sharp increase in prices. Th roughout all of this, persistently high oil prices have also seen massive rises in the cost of diesel fuel and asphalt. This was particularly noticeable in 2004 and 2005, but according to the AGC, prices for asphaltic road materials grew sharply in 2006 too.
The outlook for residential construction looks particularly grim in 2007, with data on housing permits showing a massive dive in the market. The latest data available shows the number of permits granted in the year to February stood at 1.53 million – a massive -28.6% decline on the February 2006 figure of 2.15 million. This is supported by trends in historic Census Bureau data suggesting the sector is heading for a cyclical trough this year.
In contrast, publicly-funded construction work seems to be heading for a peak, following historically low levels of growth from 2001 to 2003. Growth in the market for non-residential construction similarly looks set to top-out this year or next, after a lacklustre period at the start of the decade.
It remains to be seen whether growth in these sectors is able to o. set the nosediving housing market. It also remains to be seen how the Federal Reserve responds to this decline. A few timely interest rate cuts could help turn the situation around.
Politics may also come into the equation, with US presidential elections only 18 months away in November 2008. The issue of employment is a divisive one in the run-up to elections the world over, and any loses to the 7.7 million jobs the AGC says there are in the US construction sector could spell bad news for the incumbent Republican Party. Some sort of pre-election intervention to boost construction spending by President Bush to improve the chances of his wouldbe successor cannot be ruled-out.