Construction Barometer™ > Previous Quarters Results > News Release - 1st Quarter 2006

CONSTRUCTION BAROMETER CITES ROBUST INDUSTRY GROWTH

Commercial Contractors Keep an Eye on Material Costs & Labor Shortage

August 11, 2006 , Charlotte , NC-- For 1st quarter 2006, the Carolinas AGC Construction Barometer™ remained virtually unchanged from 2005 year-end. General strengthening across the Barometer's quantitative indicators (up 2.3%) was almost exactly offset by a general weakening across the qualitative indicators (down 3%).

Strong business growth continued throughout the Carolinas . However, in a geographic split contractors in the most rapidly growing urban areas report they don't expect the present rate of growth to be sustainable into 2007. In slower-growth regions of the Carolinas , contractors say they believe the current rate of industry expansion will likely continue into 2007.

Big gains in the Barometer's Quantitative indicators include sharply stronger demand for labor, driving the Employment & Labor Trends segment up more than 5% for the second consecutive quarter. In most regions of the Carolinas , contractors report a reasonable supply of skilled labor, with the uptick in labor demand not affecting industry wage rates or the supply of qualified workers. While labor availability remained unchanged from levels observed in late 2005, financing availability advanced 2.3% in early 2006 on modestly stronger construction loan approval rates. While short-term interest rates continued to rise throughout the quarter, contractors noted that long-term rates remained favorable, while lenders remained receptive to both.

Also on the Barometer's quantitative side, the Business & Economic Trends segment fell 1%, driven mostly by increased materials prices and uncertainty regarding inflation. Material cost represents the greatest business concern, with virtually all other quantitative indicators tracked by the Barometer pointing upward. It's noteworthy that most every segment of the construction industry is expected to continue growing strongly throughout 2006 and into 2007, including private construction (up 3.9%), highway and utility (up 2%). Given these healthy projections for stable and diversified industry expansion, Carolinas contractors are presently working to expand their businesses with 1) increased long-term borrowing, 2) increased heavy equipment purchases, and 3) significantly increased hiring plans for skilled construction labor.

On the Barometer's qualitative side, strong growth was more than offset by substantial contractor concern over rising construction materials prices, a looming shortage of skilled labor, and (in the rapidly growing urban areas of the Carolinas) increased sentiment that the present rate of industry expansion will not be sustainable into 2007. The good news is that material cost increases are expected to abate in coming months. Panelists also anticipate much more manageable-- and predictable-- materials cost inflation in 2007. This good news is offset somewhat by increasing contractor concerns regarding a potential skilled labor shortage likely to develop in 3rd quarter 2006. For the present, however, sharply stronger demand for labor is accompanied by only modestly tighter labor market conditions, and only in the most rapidly growing regions of the Carolinas .

Looking ahead, contractors are increasingly confident that the material cost inflation will subside, industry growth will continue at a slightly more manageable pace throughout the year, and the principal problem confronting contractors will involve recruiting and retaining a sufficient quantity of skilled workers.

State vs. State Comparison: Rapid Growth in NC Leads to Greater Materials and Equipment Cost Increases (NC down 0.7%; SC down 0.2%)

Barometer scores in both Carolinas fell modestly in 1st quarter 2006, but for quite different reasons. In North Carolina , the primary reason for the drop was a significant decline in the Barometer's Business & Economic indicators on the qualitative side of the index, while in South Carolina the primary reason was an 18.3% drop in Employment & Labor Market trends reported by industry suppliers and architects. Interestingly, the perceived deterioration in SC's labor market conditions reported by suppliers and architects was not reported by contractors. SC contractors noted that employment and labor market conditions remained largely unchanged from 4th quarter 2005.

NC's big drop in Business & Economic Trends was attributable to greater rates of construction materials and equipment cost increases than SC contractors reported. NC's increased materials cost inflation may be related to stronger across-the-board demand for construction supplies. NC contractors reported significantly stronger demand for labor (up 28.6%), while SC contractors reported a much slower rate of growth in construction industry positions (up 7.1%). NC contractors also reported a 10% increase in new commercial loan approvals, while SC's loan approval rates were unchanged from year-end 2005.

Regional Economic Highlights
Heartland NC : Activity Jump Leads to Material Cost Inflation and Labor Demand

(Down 1.0%)

In early 2006, the Heartland NC region experienced the state's greatest rate of commercial construction activity; however, contractors report that this strong rate of expansion is simply not sustainable throughout 2006. While construction activity is expected to continue growing for the remainder of 2006 and into 2007, the rate of industry expansion is expected to cool with the weather.

The I-85 corridor's large jump in construction project announcements triggered sharply stronger demand for labor, as Heartland contractors reported a 10% rise in new positions. At the same time, contractors reported that the substantial uptick in commercial building activity has placed increased stress on construction material supply chains, material availability, and material inflation rates, which will likely continue through 2006.

Eastern NC : Industry Growth Cools (Up 0.3%)

For Eastern NC , the Barometer increased a slight 0.3% on a surge in new private and DOT spending that caused business activity to advance 6.4%. At the same time, Eastern contractors report a slight drop in expectations that materials and equipment prices would continue rising. Increased industry price stability in the East may be related to contractor expectations that the rate of industry expansion enjoyed in early 2006 will not continue into 2007. There's a perception that new project activity will slow toward the end of 2006, and construction revenue will grow at a slower, more manageable pace in 2007. Contractors report far less tension in the regional labor market, including stable wage rates.

Western NC : Industry Growth to Accelerate (Down 0.9%)

In Western NC , expectations for future construction project growth are far different than down East. Western region panelists report strong business growth in early 2006, with continued growth throughout the year and into early 2007. As a consequence, there are rising expectations that construction equipment and material prices will continue rising at least through early 2007, with the fear that a sustained uptick in business activity will lead to a shortage of skilled workers, rising construction wage rates, and increased difficulty recruiting and retaining high quality labor.

Interestingly, commercial construction business conditions across South Carolina are almost mirror images of one another in early 2006, with the Upstate Barometer score down by just about the same magnitude that the Lowcountry Barometer increased. Even more surprising, the very Barometer component scores leading the higher Barometer value in the Lowcountry are the same components leading to the Barometer's drop in the Upstate.

Lowcountry contractors report a slight increase in overall construction costs, and expect these to continue into 2007. In the Upstate, contractors report a decrease in overall construction costs, and expect this deflationary trend to continue. Lowcountry contractors reported that labor costs had fallen modestly in early 2006, and once again, they expected this trend to continue for the remaining months of 2006 and into early 2007. Upstate contractors report a slight increase in skilled labor costs that is expected to continue for the remainder of the year.

Both SC regions agree on one aspect of the state's construction industry: a moderately stronger growth in 2007.

For a more detailed look at the Carolinas AGC Construction Barometer™ results for Quarter 1, 2006 visit www.cagc.org , Construction Market Stats. To participate as a Construction Barometer panelist, contact Lori Tharp at 704/372-1450 ext. 5227 or ltharp@carolinasagc.org.

For more in-depth analysis visit www.cagc.org and click Construction Market Stats.