Demonstrating a remarkable turnaround from the first quarter of 2000, the Carolinas AGC Barometer registered an increase of 32 percent for the spring construction season, posting new all-time highs in Western NC, Lowcountry SC and Upcountry SC; tying the past record high in Eastern NC and recording the second-highest value seen in Heartland NC.
Explaining the increase, Tony Plath, UNC-Charlotte associate professor of finance and originator of the Barometer’s methodology, pointed to the dramatic change in employment and labor trends, while also recognizing modest improvements in financing availability and business and economic trends. These factors resulted in a 66 percent increase in quantitative trends from the first quarter of 2000. Qualitative trends reflecting contractors’ perceptions rose nine percent.
According to Plath, the 161 percent increase in employment and labor conditions is driven by a significant decrease in construction industry unemployment, resulting from the activity surge of the spring construction season. Contractors in every Carolina region look for strong second quarter job growth in their firms and still greater growth in the third quarter, as they try to meet the continuing demand for skilled labor.
While this turn in unemployment rates is regarded as positive by business in general, it might create considerable challenges for contractors in the near future.
“Currently, the market appears to be able to absorb the increased demand for labor without showing higher construction labor costs,” said Plath. “This condition may be temporary, however, if the demand for labor continues into the third and fourth quarters, we likely will see higher wage rates and increased worker retention problems.”
In spite of increased business activity and the tightening labor market, there are no signs of equipment, materials or inventory shortages on the horizon. The seasonal slowdown in construction activity provided raw material and equipment suppliers with an opportunity to replenish depleted inventories, reducing supply-chain bottlenecks and shortages as well as hold prices down. Heavy equipment prices have moderated somewhat as well, as higher interest rates have almost certainly reduced the demand for fixed assets supported with debt financing.
Related to financing availability, the trend toward rising interest rates continued into the second quarter, but at a slower pace compared to the first quarter. Financing availability in the construction industry remains largely unchanged from the first quarter, with modest gains in credit availability reported in several regions. Borrowing trends across contractor firms are mixed.
Survey panelists indicate that they expect a modest decline in overall business activity in the third quarter across North and South Carolina, as higher interest rates and slower economic growth diminish construction activity and shorten pending job queues.
Plath cautioned that the Carolinas are experiencing a period of heightened volatility in the economy, which is reflected in the Barometer. “Business condition improvements from the first quarter are attributable, in part, to the normal start of the spring construction season in a very active market area. A rise in general unemployment had helped drive the first quarter Barometer results down by 15.4 percent. Just as business conditions improved markedly in the second quarter, they could deteriorate again in the fourth quarter as we reach the end of the construction year,” said Plath. “Moreover, the trend downward could be amplified by the six interest rate increases the economy absorbed in 1999 and the early months of 2000. These interest rate increases will continue to influence economic activity well into the 2001 construction season.”
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