Construction Barometer™ > Previous Results > News Release - 1st Quarter 2005

For additional information or names of local panelists contact:
Lori Tharp , Associate Dir., Business Development, Carolinas AGC
(704) 372-1450, ext. 5227; ltharp@carolinasagc.org ; www.cagc.org

CONTRACTORS MAKING DO, GOOD HELP HARD TO FIND IN RISING ECONOMY

If you're feeling the pull of having more work but not more skilled workers, you're not alone. The newest Carolinas AGC Construction Barometer™ fell 2.4 % from 4th quarter 2004, reflecting the paradox of rising construction activity and growing difficulty finding skilled employees to perform the work.

The Barometer's leading index of future construction activity is pointing sharply higher as contractors in nearly all regions of the Carolinas report they expect stronger business volume through 2005 and well into 2006. At the same time, the economic factors pushing the overall index downward were a reduction in anticipated labor demand, higher oil prices, and rising financing costs. Because the Barometer represents a composite view of the industry, the net effect was a slight negative.

The biggest surprise in the Barometer statistics is the widespread drop in anticipated construction labor demand. While contractors report growing volume and stable labor costs, they also report that it's harder and harder to hire qualified workers. So—they're simply doing without.

Moreover, contractors report they expect reduced labor demand to continue through 2005 despite a ready supply of new workers. At present, Carolinas contractors just aren't finding the sort of qualified workers they're looking for, and it appears that they're working to “make do.”

Other industry trends driving the Barometer downward in the face of rising construction activity:

• higher oil prices driving up operating costs
• rising financing costs impacting capital budgets - while contractors report friendly bankers with plenty of money available for industry lending, there are few takers for either working capital financing or long-term borrowing. In turn, we see reduced plans for capital equipment acquisition and working capital expansion. It's clear that 9 successive moves by the Federal Reserve to tighten the money supply and raise borrowing costs have realized their intended effect.

Not all Carolinas contractors report they expect an uptick in business activity to continue throughout 2006. Those in the Heartland North Carolina region report they look for new, large commercial construction projects to come on-line in 2006 at a slower pace than in 2005. Elsewhere in the Carolinas construction industry, however, just about everyone is predicting stable business growth over the 2005-06 period.

Behind the Scenes

If most everyone is so happy about the state of the industry, then why is the Barometer showing a drop in the 1st quarter?

Look inside the 3 negative factors that nudge aside the positive indicators in the aggregate Barometer—they're relatively benign.

A) Reduced labor demand in the face of growing volume reflects rising productivity of the current labor pool—always a long-term positive. In addition, the tightness of the qualified labor pool is due to increased labor demand in both the commercial arena and the red-hot residential construction industry. As a consequence, it's quite logical that commercial contractors would expect to be able to hire fewer workers, and accommodate the increase in business activity that they anticipate with their existing stock of labor.

B) The current shock in energy prices is not nearly as much a threat to economic recovery as the oil price shocks from the 1970s. In the 1970s, rising oil prices were a significant driver of economic weakness; in the 2000s, higher oil prices are a consequence of the world's economic strength. Thirty years ago, oil prices rose sharply on falling global supplies of crude oil as the OPEC oil embargo in 1973 and the Iranian revolution in 1979 reduced the world's supply of crude oil.

This time around, rising energy prices are being driven by rising demand for oil, not falling supply. In 2004 global consumption of oil grew at a faster rate than in the last 25 years, led by rapid increases in energy demand throughout China, India, and the US. Granted, the current higher fuel prices bring cause for concern among cost-conscious businesses, but they're not likely to derail the current economic recovery.

C) Finally, rising interest rates are relatively benign in the current economic environment, too. In the past, interest rate hikes triggered by Federal Reserve policy action led to a diminished appetite for lending by commercial bankers, reduced consumption and investment spending by households and businesses, rising inventory levels, and the diminished production of final goods and services. In short, rising interest rates triggered economic recession.

This time around, however, rising interest rates are accompanied by relaxed bank lending standards, continuing consumption spending by households, and rising investment spending by businesses so flush with cash that they can ignore rising financing costs and fund business expansion plans from internal capital sources. The result is a strengthening economic recovery, reduced unemployment, and a rising supply of commercial and residential construction projects.

The bottom line: our commercial contractor Barometer panelists are correct in their assessment of strengthening business conditions in Carolinas construction. This time around, it's perfectly acceptable to ignore the negative economic indicators and simply trust your business instincts.

A Look at the Stats From Local Angles

State vs. State: South Carolina Contractors Appear More Optimistic
(NC Down 3%; SC Down 1%)

Take a look at the Time Series Charts for all regions

The difference between contractor responses in the two states is attributable to two factors:

• anticipated declines in labor demand are stronger among NC contractors, who are more pessimistic about being able to hire qualified construction laborers. While SC contractors also plan to reduce their hiring plans, the rate of change in labor demand is much smaller in the Palmetto State, as contractors foresee no change in their ability to recruit and hire qualified and competent employees.
• While Tar Heel contractors in the Heartland region expect a modestly slower construction season next year, contractors throughout South Carolina expect 2006 to be a stronger year than 2005.

Heartland NC Down 3%

The big story in the I-85 corridor's Heartland region is a strengthening belief that it will become even more difficult to recruit and hire qualified workers. Since the Heartland represents the largest population of contractors in the Carolinas, this diminished appetite for labor was the major negative factor driving the composite Barometer score downward. Heartland contractors, unlike their counterparts in every other region of the Carolinas, expect generally weaker business conditions in 2006, perhaps because with the strength of the current activity, local contractors just don't expect the pace to continue into 2006. Elsewhere in the Carolinas, however, contractors expect improving business conditions through the 2006 construction season.

Eastern NC Down Only 1.6%

This slight drop is less pronounced than that of the overall index. It reflects the fact that while contractors down east report diminished demand for labor, they report stable industry activity and expect stronger business for the balance of 2005 and the coming 2006 year.

Western NC Sharply Down 7.2%

Western contractors report a sharp drop in business during early 2005. This is most likely a normal, seasonal reduction in business for Western region contractors, because Barometer panelists in the area report it likely that business conditions will improve in the remaining months of 2005, and expect stronger business for the coming 2006 year.

Upstate SC Down Only 1.6%

Barometer results in the Upstate SC region resemble those seen in the Heartland NC region, with a few important differences. The diminished demand for labor observed in the Heartland region is also evident in the Upstate, but to a much smaller extent. In addition, Upstate contractors don't believe that current difficulties seen in hiring qualified construction labor will persist throughout the remaining months of 2005. While contractors in this region are slightly more confident that business volume will remain steady thru the end of summer, they anticipate a slight drop in construction activity toward the end of 2005 and into the early months of 2006.

Lowcountry SC Up 0.5%

Lowcountry South Carolina contractors continue their tradition of going against the Carolinas overall trend by posting a 0.5 % increase in their regional Barometer score. While Lowcountry contractors did report lower anticipated labor demand for 2005, and were also pessimistic about hiring qualified labor. However, this negativity was completely overshadowed by a sharp rise in regional construction business conditions, an increase unmatched in any other region. Even better for Lowcountry contractors, the stats show a sharp increase in contractor optimism regarding 2006. For the time being, the Lowcountry represents the strongest, best performing region of the Carolinas commercial construction industry.