Carolinas AGC Barometer Reports Slow But Stable Construction, Rising Inflation Fears

Carolinas AGC Barometer Reports Slow But Stable Construction, Rising Inflation Fears

CHARLOTTE, N.C., April 5, 2011 /PRNewswire-USNewswire/ -- The Carolinas AGC Construction Barometer™ recently indicated that despite relatively stable construction conditions in the Carolinas, contractors throughout the Carolinas are deeply concerned about long-term cost increases. The Barometer's 2.2 percent fall in fourth quarter 2010 was mainly due to fears of construction inflation likely arising from concerns about food and energy price hikes, although the Federal Reserve recently reported that these are probably temporary.

While some areas of construction (public works, DOT spending) are likely to decline in 2011, Barometer panelists reported no major decline in anticipated business. Business is likely to remain slow for the majority of 2011, rise moderately toward year-end, and accelerate more briskly in 2012.

Anticipating a slow-but-stable 2011, panelists reported a drop in planned heavy equipment purchases and rentals, a lesser appetite for commercial credit, and stable demand for skilled labor. Consistent with fears of rising equipment and materials costs, panelists also reported modestly rising wage rates and employee benefits costs. Construction employment will likely remain flat throughout 2011.

In the financing arena, the availability of long-term commercial financing remained unchanged. Short-term credit availability for inventory and accounts receivable financing edged lower though, as regional bankers showed little interest in financing the run-up in materials costs. Panelists reported they expect this trend to continue throughout 2011. Contractors noted sharply stronger expectations that borrowing costs will rise, as bankers adjust the risk premiums they charge contractors. While interest rates are expected to remain at record low levels throughout most of 2011, contractors aren't likely to see much incremental benefit from them, as bankers grow increasingly wary of financing inflation-driven materials cost increases.

State vs. State: Similar, but NC Contractors More Pessimistic
(NC - Down 2.7%; SC - Down 1.2% )

Usually, South Carolina tends to exhibit greater Barometer volatility over time; year-end 2010 numbers were the opposite. Both states showed stable construction volume, rising concern over construction-related inflation, and growing dissatisfaction with the quality of available skilled labor. In North Carolina though, there were greater concerns over rising labor, materials, and equipment costs; financing heavy equipment; tighter labor conditions with higher wage and benefit costs; and reduced spending on highway, utility, and general public works projects.

While both states envisioned stable labor demand but tighter labor market conditions ahead, South Carolina contractors reported labor costs rising more rapidly than did North Carolina contractors. Credit market conditions also differed modestly; South Carolina contractors reported rising availability of long-term credit while North Carolina contractors reported little change. Contractors in both states, however, agreed the late-year short-term credit availability drop is a change likely to worsen in 2011 on rising construction materials costs.

Regional Economic Highlights

Heartland NC: Good News, Bad News...
(Down 2.1%)

While the overall Barometer score in the Heartland dipped 2.1 percent, this downturn masks two separate and opposing trends. Contractor optimism regarding anticipated construction activity throughout 2011 rose sharply from earlier levels, as local panelists expect 2011 to be a stronger year than originally forecast, with rising demand for labor expected later in the year and new public and private work coming. However, Heartland contractors reported sharply stronger expectations for rising construction costs, including labor, materials and inventory, and heavy equipment.

Although contractors expect to be busier in 2011, they're planning to accommodate the uptick with their current labor force, heavy equipment arsenal, and inventory stock. They don't want to spend money until they gain greater conviction that the economy is growing in a sustainable manner. Heartland panelists expect credit availability in their region to decline throughout 2011, and they expect financing costs will rise as bankers grow increasingly wary about approving commercial construction borrowing requests.

Eastern NC: Increased Labor Costs, Limited Labor Availability
(Down 4.3%)

In previous Barometer reports, Eastern contractors reported growing optimism about future regional construction conditions— that optimism now has faded a bit, largely due to increased labor costs and limited availability of skilled labor in the region. Consequently, Eastern contractors reported no change in planned hiring activity from the previous quarter.

Contractors in Eastern NC expect the trend in rising equipment and materials costs to continue well into 2011, as well as sluggish growth and slowed public works construction. Unlike Heartland NC contractors, Eastern contractors reported a continuing plentiful supply of funding for both short- and long-term borrowing requests. The costs for those borrowing requests are expected to rise, though.

Western NC: Drop in Business Activity, Labor Market Looks Good
(Down 4.0%)

Western contractors in previous quarters had reported growing enthusiasm regarding their industry—and just like their Eastern NC counterparts, that sentiment has changed here with the reported sharp drop in business activity. Stable local labor costs and greater availability of skilled labor will be appreciated in the Western region since panelists also reported a stronger demand for labor in 2011.

Western contractors report they now expect rising equipment and materials costs well into 2011, a slow-down in industry growth, and a contraction in public works spending. Western contractors also report a continuing plentiful supply of funding for both short- and long-term borrowing requests, but at higher costs than elsewhere in the state.  

Upstate SC: Inflation Fears Prevail
(Down 1.1%)

Upstate contractors reported significantly better business conditions at the end of 2010 than in previous quarters, even while experiencing rising labor, materials and equipment costs, and a mild drop in expectations for growth in 2011. Ultimately the fear of expected inflation in the industry nudged the Barometer score down for the Upstate region.

On the financing front, panelists reported no change in the availability of either short- or long-term money but somewhat lower borrowing rates, and little change in banker attitudes toward new borrowing requests anticipated for the first half of 2011. However, they also foresaw rising borrowing costs and tighter credit market conditions later in the year.

Lowcountry SC: Strong Demand for Skilled Labor
(Down 1.5%)

Panelists in the Lowcountry reported a slight drop in business activity, but significantly stronger demand for skilled labor, stable wage rates, and a smaller rate of equipment and materials cost inflation than elsewhere in the Carolinas. Similar to the Upstate region, Lowcountry contractors are growing increasingly fearful of significant construction cost inflation down the road.

Lowcountry contractors also reported a significant drop in availability of both short- and long-term financing, rising interest rates on all sorts of commercial credit, and growing concern that interest rates will continue moving upward throughout 2011.

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