Leading - And Misleading - Economic Indicators for Construction

The economy roared through the first quarter of 2002. But there are still plenty of doubts as to how robust the growth will be. And there's reason to think construction won't share in the celebration. What's going on?

A week ago (week of April 22) the Commerce Department's Bureau of Economic Analysis announced that real (inflation-adjusted) gross domestic product grew at a torrid 5.8% pace in the first quarter, seasonally adjusted. But nonresidential construction was left out of the party. BEA said, "The major contributors to the increase in real GDP in the first quarter were: Private inventory investment, personal consumption expenditures, government spending, residential fixed investment, and exports. The contributions of these components were partly offset by a decrease in nonresidential structures," which declined for the fourth straight quarter, plunging 20% from the end of 2001 in real terms at a seasonally adjusted annual rate. Over the past year, investment in nonresidential structures has fallen 18% in current dollars (unadjusted for inflation) from $346 billion at the start of 2001 to $285 billion last quarter. Private investment in residential structures in the same period rose 6%, from $427 billion to $456 billion, while government investment in structures and equipment (separate structures data are not available) also rose.

Just two days ago (May 1), the Census Bureau issued estimates of the value of construction put in place in March, with revised data for February and January. Residential and nonresidential private construction held steady but public construction dropped 6%. And the day before, the monthly F.W. Dodge index of construction starts in March showed 10-11% falloffs in all three of its groupings - residential, nonresidential building and nonbuilding construction.

Three sources-three results. Which to believe? The answer, as with so many questions relating to the economy, is: it depends.

GDP

GDP is the most comprehensive measure of economic activity. But to produce such a complete picture takes a long time and a relatively high degree of aggregation - that is, a lot of the interesting details get brushed out of the picture. So GDP figures cover a whole quarter. They are subject to relatively large revisions. And some sector-by-sector information isn't available until July for the previous year.

Unfortunately, the published quarterly data for residential investment includes home improvements as well as new homes; nonresidential structures includes wells and mines; and government investment includes equipment as well as public works and buildings.

Census Data

The Census data is more current, since it is issued just one month and a day after the month covered. It includes a lot of detail - more than 20 sub-sectors. And the data is not adjusted much; the latest Census release says the average percent change from preliminary estimate to first revision for total construction is only 0.6%. The Census numbers are intended to measure how much was spent or committed ("put in place") in a given month.

F.W. Dodge

The third source, the F.W. Dodge Index, which comes out about a day before the Census release, covers the same period and has a similar name, "construction activity," but actually differs significantly in concept and coverage.

The Dodge report attempts to count the value of new construction starts, that is the entire contract value of a project. Thus, a $1 billion, multi-year power plant or airport expansion contract would show up in the Dodge survey as $1 billion of activity in the month it starts, but the money would be counted in the Census totals only as it is spent, which may take several years. This makes the Dodge data "lumpier" than the Census numbers. In addition, Dodge picks up only 50-60% as much dollar volume as the Census does.

In short, the GDP report tells in very broad terms how investment in structures is contributing to economic activity and change in activity. The Census release provides the greatest detail on current activity in different construction sectors, month by month. And Dodge gives glimpses of where the largest new projects are, and whether the project pipeline is staying full or emptying out.

Other indicators

Turning briefly to some other indicators, the Federal Reserve reported widespread strengthening of economic conditions in its latest "Beige Book" survey conducted by economists in each of the 12 Fed districts. However, most districts reported weak demand for nonresidential construction.

On Wednesday of this week (May 1) the Institute for Supply Management (ISM, formerly the National Association of Purchasing Management) issued its monthly report on manufacturing. Although the overall index was in a range that indicated continuing growth, the figure was down from the previous month. (Editor's Note: The subsequent ISM Index for May showed a healthy gain, reaching its highest level since Feb. 2000.) Together, these disparate data sources suggest an economy that is growing but with a lot of exceptions.

Unfortunately, many parts of construction fall in the "exceptions." Specifically, industrial and office construction is likely to lag the upturn in manufacturing by several months. Capacity utilization is still very low, inventories have yet to pick up, and layoffs are continuing at a high level, especially in telecommunications. Until these trends turn around, there will be little call for new factories, warehouses and offices.

And power plant and government-funded construction, which have been strong in recent months, are likely to decline later this year. Electricity demand has slowed markedly, leading to more cancellations than announcements of new plants. Government spending is being pinched at federal and state levels by a drop-off in tax receipts and a re-orientation toward defense, public safety, unemployment and ever-rising medical expenditures.

In summary, the next several months will be very uneven for construction. Construction related in some way to consumer activity should remain strong, business-related construction will pick up if the economy keeps strengthening, but government-funded projects are likely to diminish once current jobs are completed.