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AGC Says Carolinas Going Through Pains Because of Prolonged Growth

Thu August 30, 2007 - Southeast Edition
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The Carolinas AGC Construction Barometer posted a 4.9 percent drop in the first quarter of 2007, but the incredible surge in business activity across the Carolinas construction industry continues unabated.

Virtually all the Barometer deterioration is attributable to tightening labor conditions. The drop, felt more strongly in North Carolina than in South Carolina, reflects entirely the growing pains associated with prolonged business growth.

The Barometer’s quantitative score — driven by market statistics — fell by a modest 0.9 percent for the quarter, driven modestly downward by a tightening labor market, rising wages, and increasingly fewer qualified workers available. The qualitative measures moved more sharply downward by 4.2 percent, based on contractor sentiment regarding the same labor issues.

Significantly, that deterioration in labor market conditions overshadowed continuing optimism about future business activity in the Carolinas. Virtually all areas of the Carolinas reported rising business activity, with growing optimism that the acceleration will continue into and throughout 2008. And, virtually all contractors surveyed are concerned that labor unavailability will not permit them to handle upcoming work.

Contractors are concerned that the sustained upward trend in activity will place greater pressure on materials and equipment costs, eventually leading to supply shortages moving into 2008.

On the Barometer’s financing side, most economic indicators were quiet in 2007’s first quarter, with reported construction loans steady and interest rates for both short- and long-term credit arrangements remained stable for the quarter. Favorable lender attitudes are expected to continue.

At mid-year 2007, the most pressing dilemma facing commercial contractors in the Carolinas is how to accommodate a sustained surge in business activity with the current labor supply.

State vs. State

Divergent Barometer trends characterized North and South Carolina in the first quarter, with North Carolina’s score down 2.4 percent and South Carolina’s score up 0.9 percent. Most of this divergence lies in different labor conditions across the two states, with N.C. contractors reporting significantly greater difficulty in hiring qualified workers and moderately rising labor costs. As a consequence of North Carolina’s tightening labor conditions, Tar Heel contractors have significantly reduced planned hiring for the remaining months of 2007, while S.C. contractors report no such reduction plans.

Apart from labor market differences, both Carolinas report rising commercial activity, strengthening business conditions and similar expectations that business volume will strengthen even more in the remaining months of 2007. The uptick in business activity appears stronger in South Carolina, while North Carolina shows momentum similar to activity levels reported in late 2006 and early 2007.

On the Barometer’s financing side, both states report falling risk-adjusted credit costs and easier credit availability. While many S.C. contractors expect long-term interest rates for construction borrowing to escalate in 2008, N.C. contractors expect borrowing costs to remain stable.

Regional Economic Highlights

The Heartland North Carolina region saw a 1.9 percent reduction in its Barometer score in the first quarter based entirely on deteriorating labor conditions in the face of strengthening business activity. Contractors reported rising expectations that business expansion will continue well into 2008, but the skilled construction labor market will be inadequate to accommodate it.

Contractors reported slightly higher wage rates in first quarter, with expected labor cost inflation to accelerate throughout 2007 and into 2008.

Central N.C. contractors report they expect stable equipment and materials costs, along with strong business activity for 2008. In spite of this optimism, contractors are growing increasingly frustrated with the tightening labor market — many Barometer panelists have simply stopped trying to recruit new employees.

Labor Shortage in Western North Carolina

The Western N.C. region led the Carolinas with the most precipitous drop (22.5 percent) in employment and labor market conditions. At the same time, Western N.C. business trends in commercial construction strengthened significantly, with rising project activity, increasing expectations that business activity will accelerate into 2008, and relatively stable construction materials costs. As with most of the state, western contractors lack the workers to accommodate all the new construction.

Financial market conditions remain favorable, with contractors reporting widespread availability of short- and long-term credit, stable borrowing costs and favorable lender attitudes.

Eastern N.C. Business Growth Slows

Eastern N.C. contractors report a slowing rate of business growth, a smaller shortage of available labor, and modestly rising materials costs. While highway and utility spending are up in both the eastern and western regions of North Carolina, construction growth in the private sector is slowing somewhat in the east.

Financial market conditions remain favorable, with contractors reporting widespread availability of short- and long-term credit, stable borrowing costs and favorable lender attitudes.

Strong Business Growth in South Carolina

The Lowcountry region posted a 2.7 percent gain for first quarter 2007, leading the Carolinas on significantly stronger business growth, stable labor costs and widespread worker availability and only modestly rising construction materials costs. Although accelerated business growth is expected throughout the state, it’s strongest in the Lowcountry. For the moment, the business growth in both the Upstate and Lowcountry is not expected to trigger a shortage of skilled workers, and contractors in both regions show no intention of reducing planned hiring activity.

Though both S.C. regions report tighter credit market conditions, this is particularly true for short-term working capital arrangements in the Upstate. In spite of this trend, both Lowcountry and Upstate contractors report a plentiful supply of long-term equipment financing available at reasonable cost and satisfactory credit terms. Contractors throughout the state anticipate steadily rising highway and utility spending throughout 2007 and 2008, and no downturn in private commercial construction activity for the foreseeable future.

For more information, visit www.cagc.org.