Carolinas contractors report lower expectations for economic improvement in 2011

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While the overall Construction Barometer score trended upward by one percent in the second quarter 2010,Carolinas AGC contractors reported diminished expectations for significant improvement in business conditions in the coming year. A slight dip in spring activity was offset by falling materials costs, lower overall construction supply costs, and record-low interest rates.

Continuing fiscal stress across the region’s state and local governments, along with the diminished federal stimulus spending, worked to suppress the level of public highway and utility projects usually observed during second quarter. Contractors reported that they expect the low level of public works construction to continue into 2011, which largely accounts for much of the diminished expectations for overall growth in 2011.

Contractors also reported stable-to-falling labor costs, and a slight uptick in hiring, particularly in the area of skilled and semi-skilled labor. The brief early summer hiring uptick appears to be seasonal and project-specific related, however, rather than indicative of a new and sustainable trend in the construction labor market.

On the financing front, contractors reported continuing record-low interest rates for both short- and long-term borrowing, but virtually no contractors reported placing new loan applications.

In short, while industry conditions for 2011 aren’t expected to significantly weaken from their present position, they aren’t expected to show much improvement, either.

Industry trends in both Carolinas were similar in the second quarter, with falling construction costs, dimming expectations for growth in 2011, and a plentiful supply of skilled labor. NC contractors reported a modest uptick in second quarter hiring, while SC contractors reported no change. However, while NC contractors are growing more pessimistic about industry trends in 2011, South Carolina contractors are a bit less pessimistic than their neighbors to the north.

In both states, falling materials costs, stable-to-falling labor costs, and a constant level of highway and utility spending were reported. Both states expected a slight increase in highway spending before year’s end, but that uptick is expected to be exhausted before the new year arrives. Increased highway spending is expected to be stronger in NC than in SC, which may explain the slightly different labor market demand.

Financial market conditions differed slightly across the two states as well. South Carolina contractors reported easier credit terms from regional bankers, while North Carolina contractors reported a modest tightening in the availability of credit and banker willingness to underwrite new contractor loans.

The uptick in the demand for skilled labor evident in the overall Barometer score was entirely attributable to industry hiring in the Heartland, which contains the three major urban areas of North Carolina and accounts for the bulk of metropolitan commercial construction projects in the state. Virtually all of the state’s growth in construction activity, the driver for increased labor demand, occurred here, with a number of urban building projects and public works construction efforts. Unfortunately, the uptick is likely to be transitory, as contractors reported diminished expectations for industry growth in 2011.

At the same time, NC contractors reported little in the way of materials cost inflation, rising labor rates, or increased materials supply prices. All of these variables as well as the labor supply are expected to remain quite stable throughout 2011. Equipment prices are expected to remain quite reasonable, although projected demand for heavy equipment is minimal.

While business conditions for contractors showed modest improvement in the Western North Carolina region, Eastern region contractors reported a downturn in construction activity for the quarter. In both regions, however, contractors expressed greater pessimism regarding the strength of industry conditions ahead for 2011. As a consequence, the demand for skilled labor deteriorated in both regions, and falling demand for labor created a surplus of workers looking for jobs in both regions. Consequently, wage rates and materials and supply costs were down. Clearly, the unexpected rise in materials costs observed in spring didn’t extend into the summer.

Credit conditions for contractors eased marginally in the West, while Eastern contractors reported greater difficulty obtaining both short- and long-term credit from area bankers. In keeping with increased contractor pessimism regarding the level of business projected for 2011, panelists expect banks to tighten lending approval rates for contractor borrowing requests in the year ahead. As a consequence, Western contractors significantly reduced their plans to buy new heavy equipment next year, while equipment demand in the East remained basically unchanged from the early months of 2010. Read More.

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