Construction Barometer™ > Previous Quarters Results > News Release - 3rd 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

For 3 rd quarter 2005, the Carolinas AGC Barometer declined 3.9% to an 8-year low of 2.79, eclipsing the previous 2.80 low for 1 st quarter 2002. Major factors in the precipitous drop this quarter were the real and perceived impact of hurricanes Rita, Katrina, and Wilma, and a general reduction in business activity in the Carolinas commercial construction industry.

However, contractors reported they continue to expect moderate business expansion in 2006, with expectations strongest in the urban regions.

The major source of hurricane-related damage to the Barometer score was rising costs, driving the Business & Economic Trends segment down by a whopping 8.8 percentage points. On the Barometer's Qualitative indicators side, Carolinas contractors were united in their expectation that construction materials, heavy equipment, and petroleum prices would continue rising.

Contractors reported slightly improved labor market conditions in the wake of reduced demand for new construction labor. Wage rates in 3 rd quarter were flat, with a slight improvement in the quality of skilled labor available. These two trends are not likely to persist far into the new year, however, as the Gulf Coast rebuilding effort accelerates.

For the coming year, contractors report rising expectations that private sector commercial spending will increase modestly, while highway and utility spending will remain flat. Local government construction is also likely to expand as state and local government jurisdictions benefit from rising tax revenues associated with growth in the general economy. When the additional Southeast construction activity related to Gulf Coast rebuilding is factored in, 2006 is shaping up with moderate growth trajectory and a diversified mix of business expansion for Carolinas commercial contractors.

Finally, on the financing side of the Barometer's indicators, contractors reported favorable equipment and real estate financing conditions, modestly rising short-term interest rates, and very little change in the volume of commercial transactions. Surprisingly, however, panelists reported a general tightening in short-term credit markets, particularly for working capital lines of credit. In spite of growing contractor expectations that interest rates will fall slightly in 2006, most panel members expect working capital financing to be less readily available, and short-term credit market conditions to be somewhat tighter, thru the year.

In most quarters, South Carolina's Barometer scores display more volatility than North Carolina, owing to the smaller size and lesser business diversity. The 3rd quarter, however, represents an exception, with the SC Barometer score falling just 0.8% while NC's score declined by 4.6%. The significant drop in the North Carolina value occurred in response to weakening business conditions, while South Carolina contractors reported almost no change in business volume during 3 rd quarter. In response, Tar Heel contractors also reported diminished hiring plans, while Palmetto state contractors indicated that they anticipated no major change in hiring plans already in place for the coming year.

Other Barometer measures, including trends in commercial credit availability, expectations for modest 2006 industry growth, and concerns of rising material and equipment costs, were quite similar across the two Carolinas. Given the stronger demand for construction labor in the South Carolina market, however, contractors there anticipate a slightly greater degree of difficulty in filling skilled labor positions in early 2006, while North Carolina contractors report that easier labor market conditions will prevail.

Regional Economic Highlights

Heartland NC: Significantly Weaker Demand for Skilled Labor (Down 4.2%)

The major story in the central NC corridor concerns the sharp drop in anticipated hiring plans, even though business conditions deteriorated only modestly. On the Quantitative side of the Barometer's measures, Employment & Labor Trends fell by 10.4%, the largest single-category change across the Barometer's 5 geographic regions. At the same time, Business & Economic Trends declined a modest 3% here, representing one of the smaller percentage changes across the Carolinas.

Heartland contractors also reported the smallest change in financing conditions in the quarter. While other regions reported a growing weakness in the market for commercial credit, they report only a modest change in lender attitudes regarding contractor borrowing plans. This probably reflects the relative size and strength of the Heartland's construction industry.

Eastern and Western NC: Very Different Markets

Eastern NC Down 1.5%; Western Down 10.9%

Barometer scores for 3rd quarter were strikingly different in the Eastern and Western North Carolina, with the East reporting the strongest business conditions across all 5 regions and the West reporting the weakest business trends. Virtually every financial indicator of the Barometer deteriorated in the Western region, and all 3 Barometer subcategories – Employment & Labor Trends, Business & Economic Conditions, and Financial Market Trends – trended sharply lower.

The major weakness in the West appears to be diminished construction activity, and significantly stronger contractor expectations that 2006 will be much slower. In anticipation, contractors reduced their demand for skilled labor, equipment purchases, financing activity, and back plans for new hiring. Curiously, however, contractors in the region reported increased difficulty in finding and hiring those new workers.

In comparison with the West, business conditions down East look surprisingly strong. Contractors in this region reported a much smaller rate of negative growth, and expect the 2006 slow-down to be much smaller than in Western NC. Labor and financial market conditions in the East region appear far more favorable, too. Contractors report only marginally diminished hiring plans for the coming year, yet they expect skilled labor to be widely available. The cost of skilled labor also looks favorable, with contractors reporting local labor costs trending downward. Finally, contractors expect greater availability of both short- and long-term financing, and they anticipate virtually no change in these relatively easy credit market conditions.

Upstate and Lowcountry SC: Lowcountry Contractors Brace for Slower Year

Barometer results in South Carolina for 3 rd quarter are very similar across the state's two regions, with reporting slower volume in late 2005, rising equipment and materials costs, and a general tightening of short term credit availability. Unlike their NC counterparts, however, contractors in both Upstate and Lowcountry have not reduced their hiring plans in response, and both regions report favorable labor market conditions and falling construction wage rates in some locations.

What really separates the two SC regions is a significant jump in the number of Lowcountry contractors that anticipate markedly slower business conditions in 2006. While Upstate contractors expect a modestly slower year, Lowcountry panelists are far more pessimistic about regional business conditions. As a logical consequence, contractors in the region report they are reducing planned expenditures for both construction materials and heavy equipment, and both short- and long term borrowing positions in 2006. Interestingly, however, anticipated construction industry hiring plans in early 2006 remain unchanged in both the Upstate and the Lowcountry of South Carolina.

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