PPI falls overall, rises for construction.

AGC President Larry Gaskins will participate in next week's Economic Forum with President Bush in Waco, Texas. In the plenary session and a smaller meeting beforehand hosted by Treasury Secretary O'Neill, he is expected to describe the major role of construction in the economy (5% of jobs, 8% of GDP) and several steps to enable construction to remain a key player in the recovery. These include: continuation of income and estate tax rate cuts, bonus depreciation and 5-year net operating loss carrybacks; adoption of tax accounting simplification for long-term contracts; enactment of higher infrastructure investment levels for highways, airports, security, energy and environmental programs; and passage of a federal backstop for terrorism insurance.

The producer price index (PPI) fell 0.2%, seasonally adjusted, the Bureau of Labor Statistics (BLS) reported Thursday. The "core rate", which excludes energy and food prices, fell 0.3%, the biggest drop in nine months. The story was different for construction, however. BLS stated, "Prices for materials and components for construction increased 0.2% in July, after inching up 0.1% in June. The rising indexes for fabricated structural metal products, softwood lumber, hardwood lumber, nonferrous wire and cable, air conditioning and refrigeration equipment, and plastic construction products more than offset price declines for gypsum products, plywood, millwork, fabricated ferrous wire products, asphalt felts and coatings, and switchgear.

The first reports on July retail sales were tepid, in contrast to near-record sales of new vehicles. Reports from more than 80 chains on sales at stores open for at least a year showed that discounters continued to record gains, albeit more modest than in June, while many department and specialty stores lost ground. Similarly, airlines continued the pattern of the past year, with smaller and discount-oriented airlines showing gains in traffic compared to July 2001 but major airlines having declines.

Mortgage rates on 30- and 15-year fixed mortgages fell this week to the lowest levels in the 32-year history of Freddie Mac's weekly survey. Meanwhile, consumer credit expanded more modestly in June, 5.9%, than in May, 6.7%, the Federal Reserve reported Wednesday. Together, these data suggest that many consumers will have the chance to refinance mortgages at lower rates and that consumers are not getting overextended. Indeed, last week the Commerce Department reported that the personal saving rate rose in June to 4.2%, up from an average of 2.3% in 2001.

BLS has started a new Job Openings and Labor Turnover Survey (JOLTS), which estimates the number and rate of U.S. job openings, hires, and separations by industry and geographic region. (See www.bls.gov/jlt) JOLTS was designed to provide a more comprehensive analysis of the labor market and how changes in labor supply and demand affect the economy. In its first release July 30, BLS stated, "Over the year ended in May 2002, the largest decline in job openings occurred in construction, where the rate fell from 3.4% to 1.9%." This suggests that demand for workers shrank, relative to the starting point, more rapidly in construction than in other industries. (Demand for workers began falling earlier in manufacturing. Thus, from May 2001 to May 2002, manufacturing may still have lost more jobs but its rate of job loss was slower than in construction.)

Contrary to most indicators about construction, the Institute for Supply Management (ISM)'s July non-manufacturing survey of supply executives listed construction among the industries that reported the highest rates of growth of business activity and new orders (but not employment change) in July. However, the ISM says its survey covers 370 executives spread among 62 industries; thus, it is likely that very few construction executives are included. Furthermore, the survey is relatively new and it is not known how well it correlates with industrywide conditions. Overall, the survey signaled growth but, for the second straight month, at a slower pace than the month before. Consistent with the BLS price report, the survey also listed construction among the industries reporting the highest rates of increase in prices paid. Real estate was the only industry reporting a rising backlog of orders.

To receive AGC President Gaskins' talking points, contact me or Dennis Day, dayd@agc.org, or call 703-837-5310.