“The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 4-1/4%,” the Federal Reserve reported today. “Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks….Readings on core inflation have improved modestly this year, but elevated energy and commodity prices, among other factors, may put upward pressure on inflation.”

One sign of slower growth was the report on Friday from the Bureau of Labor Statistics (BLS) that nonfarm payroll employment increased 94,000 in November, seasonally adjusted, well below the 12-month average gain of 127,000 (1.1% per year). The unemployment rate remained at 4.7%. Total construction employment fell 24,000 in the month and 121,000 (1.6%) over 12 months. Residential building and specialty trades employment dropped 20,000 and 158,000 (4.7%), respectively. Nonresidential building, specialty trades and heavy and civil engineering employment fell 3,500 in November but rose 37,000 (0.9%) over 12 months. However, based on the 17% drop in residential construction spending that the Census Bureau reported for October, it is likely that as many as 400,000 “residential” specialty trade contractors are actually doing electrical, plumbing, drywall, concrete and other work in nonresidential projects. Adding those workers to the nonresidential total would imply job gains of 10%, much closer to the 15% gain in nonresidential spending over the last year. Strong growth in nonresidential employment is more consistent with the rise in average hourly earnings in construction to $21.27, up 21 cents in the past month and 90 cents (4.4%) over 12 months, outpacing the 3.8% rise for all private production or nonsupervisory workers. Architectural and engineering services employment, a harbinger of demand for construction, rose 48,000 (3.4%) over 12 months.

The national average retail price of on-highway diesel fuel dropped 9 cents per gallon this week, the Energy Information Administration (EIA) reported on Monday. However, at $3.32 per gallon, the average is 70 cents (27%) higher than a year ago. Today, EIA projected in its latest Short-Term Energy Outlook that diesel would average $3.21 in 2008, up 11.4% from the projected 2007 average of $2.88 and an acceleration from this year’s projected increase of 6.8%. Contractors use diesel fuel directly for offroad equipment and construction vehicles, and they often pay a diesel fuel surcharge on deliveries of equipment and materials to jobsites and pickups of dirt, debris and equipment at the end of a job. The Outlook projected that the price of natural gas, the feedstock for many construction plastics, would rise 4.1% in 2008 after dropping a projected 4.4% in 2007.

Moreover, the Outlook projected that gasoline consumption would rise 0.6% in 2007 and 1% in 2008. A year ago, the Outlook projected an increase of 1.1% in 2007. The drop is likely to mean a smaller rise in federal and state highway trust fund receipts, the major or sole funding sole for highway construction in many states, because revenues are based on gallons sold, not price. In addition, weaker demand for freight is likely to slow the growth revenues from diesel fuel and truck excise taxes. The American Trucking Associations reported on November 27 that its truck tonnage index for January-October 2007 was 2.2% percent lower than during the same period in 2006. The index fell 1.7% in 2006.  Some states have already announced highway construction cutbacks. “The Texas Department of Transportation…says it's running out of money for new construction, forcing it to reduce the number of projects let in 2008 and beyond,” the Dallas Business Journal reported on November 30. The agency has also seen a 62% increase in its construction costs since 2002 [and] estimates an $86 billion funding gap for future maintenance and construction.”

Military construction costs also are rising. The Government Accountability Office reported today (http://www.gao.gov/new.items/d08159.pdf) that the Base Realignment and Closing (BRAC) Commission “estimated that to implement the BRAC recommendations, military construction costs would be about $13 billion, whereas…current estimates for military construction, without inflation, were about $20 billion.” The report cites specific construction cost increases for additional facilities in New York, Maryland, Virginia and Texas. “USACE [U.S. Army Corps of Engineers] officials told us the actual rate of construction inflation for the last several years has exceeded the federal government’s inflation rate used for budgetary purposes, which is required to be used in budgeting for construction projects. While this difference was as high as 6.1 percentage points in 2004, the difference between the actual rate of construction inflation and the government’s budgetary inflation rate has diminished recently. USACE officials told us that if the extent to which the actual rate of inflation continues to exceed the budgeted rate as implementation proceeds, and if construction material costs are higher than anticipated, they would either have to redirect funding from other sources to provide for construction projects or resort to a reduction in the scope of some construction projects.”