Reflecting the influence of national economic conditions on the Carolinas’ economy, first quarter results for the Carolinas AGC Construction Barometer signal a decided decline. The grand index decreased to 2.36 on a scale of one to five, representing the largest drop in the index since its inception in the third quarter of 1998.
In explaining the drop, Tony Plath, UNC-Charlotte associate professor of finance and originator of the Barometer’s methodology, pointed to several economic trends, including a rising level of general unemployment in the North Carolina/South Carolina region, rising interest rates and increased interest rate volatility, and reduced heavy equipment purchases and rentals by area contractors.
These factors all contributed to the 27.9-percent drop in the quantitative component of the Barometer, contrasting with a much less severe decline in the Barometer’s qualitative component. On the qualitative side, contractor perceptions of economic strength in the two-state region fell only 4 percent in the first quarter, while managers within allied firms reported a 7.2-percent drop in business confidence.
According to Plath, the central contractor concern that springs from the Barometer’s deterioration is whether the rising rate of unemployment observed across the Carolinas is occurring inside or outside the construction industry. “While we’re seeing an increase in the general level of Carolinas unemployment, this increase does not appear to be showing up in the construction industry, where labor conditions remain very tight,” said Plath. He said the increase in general unemployment may spell relief down the road for area contractors, because an increase in general unemployment will hold down some of the upward pressure on construction wages, particularly for unskilled workers.
Plath explained that contractor-panelists reported almost no change in hourly labor costs in the first quarter, and they expected little change in labor costs over the course of the coming quarter. Contractor worry is centered exclusively on the increased difficulty they face in hiring skilled labor, and the perception that this difficulty will grow stronger in coming months — not on the possibility of wage inflation.
Concerning the drop in heavy equipment acquisitions and rentals by contractors that the Barometer reports, Plath suggested that higher interest rates — coupled with the slow winter-season demand for equipment purchases and rentals — explain this statistic. While the spring construction season will bring some improvement to heavy equipment purchases and sales, higher interest rates should cause this value to remain below average throughout the remainder of the year.
Survey panelists reported that they expect slower economic growth in coming months, and expressed less interest in making major expenditures for equipment and inventory. This trend is largely attributable to rising bank financing costs, tighter lending terms, and a general slow-down in the rate of economic activity within the Carolinas region.
In summary, Plath stated that, “Contractors in the two-state region can expect the weakening in general business conditions to continue over much of the next year,” and that this trend “isn’t necessarily bad news.” Across the board, the silver lining in slower economic growth for the construction industry is “much less inflationary pressure, with overall costs not likely to increase in the near term, and far fewer supply-chain disruptions. It appears that the Fed’s tightening of monetary growth is having the intended effects of slowing economic activity and limiting the acceleration of price inflation in the economy,” said Plath.
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