Nonresidential’s Mixed Indicators

Years have passed since the economic bust, and Associated Builders and Contractors Inc. (ABC) reported at the end of first quarter 2011 that the Construction Backlog Indicator (CBI) — “a forward-looking economic indicator that measures the amount of construction work under contract to be completed in the future” — had increased 4 percent as compared to the fourth quarter of 2010. ABC’s chief economist, Anirban Basu, declared, “While the commercial and industrial construction industry is no longer in deep decline, meaningful recovery remains elusive.”

However, he also made an encouraging statement in an ABC press release: “Crisis conditions have abated and the indicator is moving in the right direction. CBI is now above its historic low point of 5.5 months registered in Jan. 2010.”

The 2011 second quarter report released by ABC proved Basu’s predictions seemingly correct. The CBI had increased 10 percent in the second quarter as compared to the first of 2011. Despite the good news, the economist cautioned, “While the increase in construction backlog appears to be good news at first glance, taking a broader look reveals that the rise in the nation’s construction activity may be a reflection of the economic momentum that existed several months ago, but is now beginning to weaken.”

He added, “The nation’s economic recovery has remained fragile since June 2009 and any observed recovery in construction volumes has been tentative.”

By the third quarter of last year, ABC indicated that although a decrease had not occurred in the CBI, the number had stagnated at 8.1 months. This number, though unchanged from the second quarter of 2011, was reportedly up 16.3 percent compared to the same time 2010.

“The implication of the third quarter CBI data is that momentum in the U.S. nonresidential construction industry is in the process of stalling,” noted Basu. “The question remains: Will the nation’s commercial and industrial construction industries face a long-term slump or become reinvigorated in the new year?”

Although ABC hasn’t released 2011’s fourth-quarter CBI, it did report that November’s nonresidential construction spending had increased 0.9 percent to a seasonally adjusted annual rate of $555.7 billion according to the Jan. 3 report by the U.S Commerce Department. Despite the small increase, the government agency reported that 2011’s total nonresidential spending was down 0.1 percent from one year ago.

“Private nonresidential construc-tion spending was unchanged for the month, but is 4.5 percent higher than November 2010,” said
ABC’s report. “Public nonresidential construction jumped 1.8 percent in November, but is still down 4.4 percent year-over-year.”

Moving beyond the CBI, in December ABC reported that construction unemployment had jumped to 16 percent; an increase from 13.1 percent in November. The agency’s chief economist cautioned those interpreting unemployment numbers to do so with care.

“The increase in construction unemployment is primarily associated with seasonal factors and should not be interpreted as evidence of industry decline,” he explained. “For all of 2011, the construction industry added 46,000 jobs, representing the best industry performance since January 2007.”

Residential Market’s Tale

As for the residential construction market, this roller coaster began in January of last year when Ken Simonson, chief economist for the Associated General Contractors of America (AGC), reported, “AGC members polled about the outlook for 10 categories of construction in 2011 remained cautious but were more upbeat about hiring than in 2010.” Job numbers and the pricing index remained unstable as job losses and price increases challenged the market. Residential construction remained at low levels in February, but pockets of regional improvement increased some job numbers, and according to the National Association of Home Builders (NAHB), “a return to healthy market conditions for both new and existing apartment and condominium buildings” was being indicated.

March 2011 showed private residential construction spending up 2.6 percent for the month, according to Simonson, even though that number was 8.1 percent below the year-earlier total.

“In another sign that construction job losses may be stabilizing, the number of mass layoff events (layoffs involving 50 or more employees in a month) in construction edged down from 163 in April 2010 to 161 in April 2011 (-1 percent) not seasonally adjusted,” explained Simonson, quoting the U.S. Bureau of Labor Statistics (BLS).

As the year progressed, the market experienced many ups and downs as it regionally advanced and decelerated based on economic and market occurrences across the nation. The fourth quarter of last year was showing overall signs of improvement. CNNMoney reported that new home sales were “edging up” and referred to November’s numbers as a continuation of the “modest housing market winning streak.”

According to the numbers quoted from the U.S. Census Bureau, “November sales of existing homes rose 12 percent year-over-year; homebuilding spiked nearly 21 percent compared with 12 months ago; and some mortgage rates were hitting record lows.”

Contractor Outlook

How did HVAC contractors feel about all of these mixed signals and economic indicators in 2011? It’s hard to say, but the Air Conditioning Contractors of America (ACCA) began measuring contractor attitudes toward short-term economic growth with the Contractor Comfort Index (CCI) in February 2010.

“The CCI is calculated based on a survey of the association’s contractor members who are asked how positive they feel about new business prospects, existing business activity, and expected staffing decisions in the short-term future,” said the association. “Weighted and averaged into one number, a CCI of 50 or above reflects anticipated growth.” (See Figure 1.)

According to the chart, it seems as though contractors’ confidence waned some with the tumultuous events of 2011. Natural disasters, economic crises, and overall uncertainty often led ACCA to refer to the 2011 mood as cautiously optimistic. For savvy HVAC contractors — whether in the commercial or residential market — numbers, reports, and confidence levels will only help so much. The rest will likely depend on contractors’ willingness to work hard and their determination to succeed no matter what 2012 holds.

Figure 1: ACCA Contractor Comfort Index

2011                         2010

January: 56             January: NA
February: 60           February: 55
March: 62                March: 60
April: 69                   April: 65
May: 66                    May: 68
June: 66                 June: 69
July: 63                   July: 64
August: 53             August: 61
September: 51     September: 57
October: 58           October: 62
November: 55      November: 65
December: 53      December: 61

Sidebar: Account for the Bust

Sometime in 2001, as improved mortgage rates and questionable lending standards increased credit approval ratings, the residential and commercial construction markets began their profitable journeys that ultimately led to one of the largest economic bubbles the United States has experienced. Of course, there were multiple factors that contributed to the country’s overall economic equation, but the housing boom spawned an era of great demand in the residential and then in the commercial sector. As the market continued on what many argued was an unsustainable trajectory, conservative economists warned of a bust. When the bust came, the economy began a steady and steep decline, and so did the residential and then commercial construction markets.

Once the economy reached what was considered its bottom, the fight to regain profitable ground began as headlines spoke of falling skies and skyrocketing unemployment rates. Over the course of multiple government bailouts and years of extreme belt tightening, some economic sectors have seen slight upticks and promising numbers when it comes to increased demand and increased profit margin percentages. The industries most steeply affected were primarily those most closely associated with the popped economic housing bubble — including construction.

Publication date: 01/23/2012