Barometer Moves Up – But for the Wrong Reasons; Carolinas AGC Construction Barometer(TM)

CHARLOTTE, NC, – Febvruary 17, 2009 –  The Carolinas AGC Construction Barometer moved up 3.9% in 3rd quarter 2008, but the increase is primarily attributable to rapidly falling construction costs and widespread skilled labor availability — considered positive indicators when they occur to a lesser degree in normal economic times.

Commodity and petroleum prices are falling due to increased supply and more importantly, significantly weaker demand for building products, construction equipment, and petroleum products. Despite rising employee benefit costs, contractors report lower overall labor costs and expect lower rates and widespread labor availability throughout 2009. In keeping with recession-related expectations, other Barometer indicators were sharply lower. Contractors also report a sharp decrease in the availability of short-term credit attributable to the bank crisis. Availability of long-term equipment financing is also tightening, but not as much as for working capital.

In summary, the 3 clear trends for 3rd quarter do not represent good news for commercial contractors. First, business conditions reflect a deepening general recession. Second, all Barometer signs point to unfavorable business conditions throughout 2009 with little mid-year relief. Third, and perhaps most ominous, typically recession-resistant sources of commercial construction spending, like public sector projects and highway spending, are expected to stay down through 2009.

State vs. State: Market Activity Falls Sharply in SC (NC — Up 3.1%; SC — Up 5.8% )

The same business trends driving the overall Barometer score upward were more pronounced in South Carolina than North Carolina. In particular, SC contractors report more rapidly falling construction materials costs, equipment costs, and labor market costs. The rate of deterioration in construction activity appears to be marginally greater in South Carolina though, and contractors expect a greater contraction through 2009. Both states expect diminished public works spending, although the downward trend is more pronounced in North Carolina. Both states report decreased availability of short-term working capital lines, but NC contractors report a much steeper rate of decline in financing for long-term equipment purchases.

REGIONAL ECONOMIC HIGHLIGHTS
Heartland NC: Activity Falls Sharply

Heartland NC advanced 4.3% in 3rd quarter, moving up sharply on lower construction industry materials costs, falling heavy equipment costs, and lower labor costs. The changing commercial landscape is driven largely by collapsing demand for building inputs, as contractors report significantly lower business activity and sinking expectations that 2009 will bring any industry improvement. As unemployment edges higher and business activity sinks lower, contractors report falling demand for skilled labor, reduced highway and utility expenditures, and increasingly risk-averse bankers unwilling to lend for both short-term working capital and long-term equipment purchases. Contraction in both public and private spending is expected; and it’s likely that recovery will not occur until the Spring 2010 construction season arrives.

Eastern NC & Western NC: Big Drop in West

Both the Eastern and Western regions of NC experienced recessionary conditions in 3rd quarter, but the fall was much more pronounced in the West. In the Eastern region the magnitude of drop in business was less and expectations for 2009 more sanguine.

The East was buffered by rapidly falling construction materials costs, and lower heavy equipment costs and labor costs. Paradoxically, in spite of falling demand for work in the West, contractors reported rising materials costs; however, heavy equipment costs and labor costs trended lower. In both regions contractors reported lower demand for skilled labor, virtually no hiring plans for 2009, and rising expectations that wage rates will remain stable. Financing conditions deteriorated in both areas as well, with reduced availability of both short- and long-term financing, particularly in the West.

Upstate & Lowcountry SC: Coastal Optimism

SC Barometer values moved sharply higher in 3rd quarter, rising 4.1% in the Upstate and 10.1% in the Lowcountry on falling materials and equipment costs, and weakening labor conditions. These trends match North Carolina’s, but South Carolina contractors are far more optimistic than NC contractors. Both SC regions report slowing activity; but Upstate contractors expect marginal deterioration in business conditions into 2009 while Lowcountry contractors actually expect strengthening activity.

Carolinas AGC builds its 2,800 members’ businesses through workforce development, business development, profit management, and workers’ compensation insurance. More than 75% of commercial and industrial construction (buildings, highways/bridges, utility facilities) in both North and South Carolina is performed or supported by CAGC members.