Construction Trends

January 2009

ABC Forecasts Downturn in 2009 Construction Activity
Associated Builders and Contractors’ 2009 economic forecast for the commercial and industrial construction industry does not paint a pretty picture.

"While the industry experienced a mixed bag in 2008, do not expect the same story in 2009,” said ABC Chief Economist Anirban Basu.

"For more than a year, economists have been discussing how weak the overall economy has been. The ongoing credit crunch began in earnest in August 2007 and the U.S. economy shrank during last year’s fourth quarter,” Basu said. "Because commercial construction typically lags the overall economy by one to two years, the weakness that has pummeled other segments of the nation’s economy has not been as apparent in commercial construction performance.

"However, that is about to change in 2009,” added Basu. "One of the most telling signs that we will see a downturn in commercial and industrial construction activity is the dramatic fall of the Architecture Billings Index, produced by the American Institute of Architects. In October, the ABI rating reached a historic low not seen since the rating system was established in 1995. While nonresidential construction employment was down 4.7 percent on a year-over-year basis in October, this level of job loss pales in comparison to what is likely to emerge over the next 12 months.

"ABC expects that the reversal in industry fortunes will be increasingly manifested in the 2009 and 2010 data. It is worth noting that producer prices also will begin to decline more forcefully in the months ahead due to the deflation in key commodities, including copper, steel and oil. However, this will help accelerate the sector’s eventual recovery.”

In comparing year-to-year performance from 2007 through 2008, for the most part, the industry has held up well, with total nonresidential construction put in place rising in every industry with the exception of the commercial segment.

But the story will not be the same in 2009:

Commercial building, such as retail and restaurants, will be off between 10 percent and 20 percent in dollar terms compared to 2008.

Lodging will be negatively impacted by both a general decline in new construction activity and a reduction in personal and professional travel. This segment has been one of the leading engines of construction starts, but value put in place may decline 20 percent or more next year.

Office construction will be off between 15 percent and 25 percent in 2009 due to ongoing difficulties in the financing environment, as well as waves of job losses in key office segments, such as financial services.

Manufacturing will see a sharp decline after registering massive gains during the past several years. With domestic and global demand for manufactured products now falling decisively, expenditures on manufacturing-related buildings will fall in the neighborhood of 25 percent to 35 percent, with declines likely to persist into 2010.

Institutional construction, such as hospitals, prisons and schools, will also soften due to a combination of state and local fiscal duress and the ongoing turbulence in the municipal bond and similarly situated financial markets. As a result, institutional building construction will slip more than 5 percent in 2009 in terms of dollars expended.

Power construction investment, especially in the alternative energy-related segment, will continue to trend higher even as electricity utility construction declines (down 30 percent in 2009) in the face of financing difficulties and retreating energy prices. Alternative energy investment will receive a boost from the incoming administration, which has committed to supporting segments such as wind, solar and biofuels.

As 2009 looks to be a challenging year for the commercial and industrial construction industry, the next federal stimulus package being discussed in Washington, D.C., which will likely include a significant infrastructure component, may emerge as a countervailing force. While it will take some time to implement such a program, an infrastructure-based stimulus package may address both issues of short-term economic weakness and longer-term competitive needs. Moreover, investment in infrastructure represents a way for the federal government to take advantage of now declining construction input prices, allowing it to purchase more infrastructure for each dollar spent.

Builder Confidence Remains at Record Low in December
Builder confidence in the market for newly built single-family homes held at a record low in December as deepening economic turmoil, a deteriorating job market and an ongoing flow of foreclosed homes onto the market continued to negatively impact sales conditions. The National Association of Home Builders/Wells Fargo Housing Market Index did not budge in December from November’s all-time low reading of 9, with two out of three component indexes losing further ground.

Derived from a monthly survey that NAHB has been conducting for more than 20 years, the NAHB/Wells Fargo HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as "good,” "fair” or "poor.” The survey also asks builders to rate traffic of prospective buyers as "high to very high,” "average” or "low to very low.” Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view sales conditions as good than poor.

Two out of three of the HMI’s component indexes registered some further deterioration in December. The index gauging current sales conditions and the index gauging sales expectations for the next six months each declined to new record lows, falling one point to 8 and two points to 16, respectively. The index gauging traffic of prospective buyers held at a record low of 7 for the month.

Two out of four regions posted declining builder confidence readings in December, with the Midwest and South edging down one point and two points, to 6 and 10, respectively. The Northeast held even with the previous month’s 11 reading, while the West posted a one-point gain to 7.

Construction Materials Prices Continue Downward Slide in November Construction materials prices continued their downward slide in November for the second month in a row falling to 3.5 percent, according to the Dec. 12 producer price index report by the U.S. Labor Department. This figure exceeds the 2.8 percent monthly decline in October, which was previously the largest one-month decrease in more than 22 years. Despite the drop, construction input prices are still up 4.9 percent from the same time last year.

Prices for fabricated structural metal products dropped 0.9 percent. This marked the largest monthly decline since 1957. Still, prices are 13.8 percent higher than November 2007. Plumbing fixtures and fittings prices dropped by 0.6 percent last month, but are up 3.5 percent from one year ago. Nonferrous wire and cable prices fell 10.8 percent from the previous month. However, the price is down 13.1 percent compared to November 2007—the largest year-by-year decline since 1998. Prices for fabricated ferrous wire products decreased 2.3 percent in November better than offsetting the monthly increase of 2.0 percent the previous month. This marks a 27.2 percent price increase since November of 2007. Softwood lumber prices decreased 2.6 percent since October and are down 7.8 percent from a year ago. Asphalt felts and coatings prices dropped 1.5 percent after having increased for eight consecutive months. Still, prices are up 57.3 percent from November 2007.

Crude energy prices continued to post major declines, down 18.7 percent for month following a 24.9 percent decline in October. Crude petroleum continued to lead the way dropping 30.2 percent in November. Overall, wholesale prices fell for the fourth straight month, down 2.2 percent for the month.

Employment in Construction Down by 780,000 Since September 2006 The U.S. Department of Labor has become a harbinger of bad news. More construction workers lost jobs in November.

Employment in construction fell by 82,000 in November, with losses occurring throughout the industry. Since peaking in September 2006, construction employment has decreased by 780,000. Specialty trade contractors lost 50,000 jobs in November, with both residential and nonresidential components contributing to the decline.

The big picture revealed that nonfarm payroll employment fell sharply (–533,000) in November, and the unemployment rate rose from 6.5 to 6.7 percent, according to figures released on Dec. 5 by the agency’s Bureau of Labor Statistics. November’s drop in payroll employment followed declines of 403,000 in September and 320,000 in October, as revised. Job losses were large and widespread across the major industry sectors in November.

Both the number of unemployed persons (10.3 million) and the unemployment rate (6.7 percent) continued to increase in November. Since the start of the recession in December 2007, as announced by the National Bureau of Economic Research, the number of unemployed persons increased by 2.7 million, and the unemployment rate rose by 1.7 percentage points.

October Construction Falls 9 Percent New construction starts tumbled 9 percent in October to a seasonally adjusted annual rate of $471.6 billion, according to McGraw-Hill Construction, a division of The McGraw-Hill Companies.

Nonresidential building in October dropped 9 percent to $208.1 billion (annual rate).

Residential building, at $143.7 billion (annual rate), was down 10 percent in October. The weakness for residential building covered all five major regions, with this year-to-date pattern: the West, down 47 percent; the Midwest, down 41 percent; the South Atlantic, down 40 percent; the South Central, down 30 percent; and the Northeast, down 25 percent.

For the first 10 months of 2008, the 15 percent drop for total construction compared to last year was due to this performance by major sector: residential building, down 38 percent; nonresidential building, unchanged; and nonbuilding construction, up 2 percent.

Breaking down further the year-to-date performance for nonresidential building shows the following: commercial building, down 16 percent; institutional building, up 6 percent; and the manufacturing building category, up 57 percent.

By geography, total construction in the January–October period of 2008 revealed this behavior: the West, down 28 percent; the South Atlantic, down 25 percent; the Midwest, down 11 percent; and the South Central and Northeast, each down 1 percent.

IRS Announces 2009 Standard Mileage Rates
The Internal Revenue Service has issued the 2009 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes. The new rates are slightly lower than rates for the second half of 2008 and reflect changes in gasoline prices.

Beginning on Jan. 1, 2009, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be as follows:

• 55 cents per mile for business miles driven.
• 24 cents per mile driven for medical or moving purposes.
• 14 cents per mile driven in service of charitable organizations.

The new rates for business, medical and moving purposes are slightly lower than rates for the second half of 2008 that were raised by a special adjustment mid-year in response to a spike in gasoline prices. The rate for charitable purposes is set by law and is unchanged from 2008.

The business mileage rate was 50.5 cents in the first half of 2008 and 58.5 cents in the second half. The medical and moving rate was 19 cents in the first half and 27 cents in the second half.

The mileage rates for 2009 reflect generally higher transportation costs compared to a year ago, but the rates also factor in the recent reversal of rising gasoline prices. While gasoline is a significant factor in the mileage rate, other fixed and variable costs, such as depreciation, enter the calculation.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for any vehicle used for hire or for more than four vehicles used simultaneously.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

Revenue Procedure 2008-72, which can be found at www.irs.gov, contains additional information on these standard mileage rates.

Jan. 15: Time to E-Verify
Effective Jan. 15, 2009, federal contractors and subcontractors must begin using the U.S. Department of Homeland Security and the Social Security Administration’s E-Verify system to verify their employees’ eligibility to work in the United States. The final rule appears in the Nov. 14, 2008, issue of the Federal Register.

E-Verify is a free government service to verify, via the Internet, the employment eligibility status of newly hired employees. E-Verify is administered by the DHS in partnership with the SSA. The goals of E-Verify are to reduce unauthorized employment, minimize verification-related discrimination, be quick and non-burdensome to employers, and protect the privacy and civil liberties of employees.

The final rule requires contractors to
• Enroll in E-Verify within 30 days of the contract award.

• Initiate verification of all employees assigned to a covered contract within 90 days of enrollment in E-Verify, or within 30 days of the employee’s assignment to the contract, whichever is later.

• Begin within 90 days of enrollment in E-Verify to verify all new employees hired during the period of performance (whether or not assigned to the contract) within three business days of hire.

• Flow down these requirements to all subcontracts over $3,000.

For more information visit https://www.vis-dhs.com/employerregistration. Also, the American Subcontractors Association’s Web site (www.asaonline.com, then click on "subcontractor Advocacy” and then "ASA Federal Advocacy”) contains a fact sheet outlining what this rule means for subcontractors.

FMLA Benefits Expand Starting in January
On Nov. 18, 2008, the U.S. Department of Labor released its final rule implementing changes to the Family and Medical Leave Act of 1993 (Public Law 103-3), including expanded leave rights for parents during pregnancy and adoption, and for service members’ families. The FMLA already required covered employers to provide for up to 12 work weeks of leave in a 12-month period for covered employees in circumstances such as these:

• Caring for the employee’s newborn son or daughter.

• Placement of a son or daughter with the employee for adoption or foster care.

• Care of an employee’s spouse, parent, son, or daughter with a serious health condition.

• An employee’s inability to work due to a serious health condition.

The new rule, which implements the 2008 National Defense Authorization Act (H.R. 4986) and takes effect Jan. 16, 2009, provides that an "eligible employee who is the spouse, son, daughter, parent, or next of kin of a covered service member shall be entitled to a total of 26 workweeks of leave during a [single] 12-month period to care for the service member” after returning from military deployment. FMLA benefits will extend to covered employees whose family members are called to active duty or are preparing to be called up, and military-related "exigencies” such as short-notice deployment, military briefings and ceremonies, and coping with legal and financial responsibilities.

In addition to expanding the FMLA rights of service members’ families, the rule also revises the definition of "parent” in the pregnancy and adoption leave sections of the FMLA, allowing both parents to qualify for FMLA coverage with documentation confirming the parent-child relationship. It also clarifies how FMLA benefits work under a joint employer relationship, such as when a professional employment organization employs a worker. The FMLA applies only to certain employers—those with 50 employees within a 75-mile radius. An employee must have at least 1,250 hours and one year of service with his or her employer to take appropriate accrued paid leave or employer-approved, unpaid leave under the FMLA.

Klamke Retires
Steve Klamke, the executive director of the EIFS Industry Members association, retired from his position Dec. 31, 2008.

Klamke became executive director in 1997 and has served the EIFS industry through some of its most difficult days. He started during the peak of the class action lawsuits in North Carolina and carried EIMA successfully through adversity.

After EIMA shifted its focus to technical issues, Klamke reorganized EIMA and then qualified EIMA as an accredited ANSI standards organization, paving the way for the first comprehensive industry standards. Building on the ANSI standards, he guided the EIMA team that finally achieved the incorporation of EIFS into the IBC and IRC building codes after years of effort.

Klamke was front and center in defending the industry nationwide in the press, with the construction industry and in locales such as New York City, Eastern Virginia, Oregon, Chicago and most recently Las Vegas.

Now that EIMA is again refocusing its mission, his recent success with the ORNL/DOE Net Facilities research project has given the industry an incredible tool with which to promote the exterior system.

EIMA is in the process of searching for Klamke’s successor.

In Memoriam: Walt Pruter
Walter (Walt) Frederick Pruter Jr., of Palm Desert, Calif., died Nov. 10, 2008. He was 84.

Pruter was recognized as an authority on building codes and standards relating to wall and ceiling construction. He was instrumental in helping to establish the Plaster Information Bureau in 1952 to provide accurate and unbiased information to design professionals so that they might better detail and specify better quality plaster construction. In the beginning, Pruter directed the operations of the PIB; he later moved on to expand the bureau’s services to include lathing and steel stud framing. Through various association mergers and name changes, today the PIB is the Technical Services Information Bureau of the Western Wall and Ceiling Contractors Association.

Pruter served on various industry related associations and committees, wrote numerous technical articles for national magazines, and co-authored several publications. After retirement, Pruter continued consulting and served as senior technical consultant for the TSIB of the WWCCA.

After high school, Pruter served during WWII as an Aviation Cadet in the United States Navy, flying the SBD Dauntless off of carriers in the Atlantic. After serving in WWII, he went on to attend the Illinois Institute of Technology, earning a degree in architecture. He was always proud to have been trained under the tutelage of Ludwig Mies van der Rohe, who is widely regarded as one of the pioneering masters of modern architecture.

From 1949 to 1952 Pruter served as an architectural representative for the United States Gypsum Co. in Chicago, Washington, D.C., Philadelphia and Baltimore. From 1952 until 1954, he was employed by Kaiser Aluminum & Chemical as their architectural representative for the Western United States. In 1954 he established the Information Bureau for the Southern California Plastering Institute and served as technical director before organizing the Information Bureau for Lath, Plaster and Drywall.

In 1948 Walt married Lois Adams. They lived in Western Springs, Illinois, Virginia and Chicago before moving to California. They had four children. In 1985 Walt married his current wife, Carol. They lived in Glendale, Calif., until retiring to Palm Desert, Calif., in April 1999. They purchased a second home in Ironwood Country Club in Palm Desert and spent many weekends enjoying golf, tennis and the company of their many friends.

Memorials can be made to Episcopal Appalachian Ministries, 5204 Vanardo Way, Knoxville, TN 37912 (www.Visit-EAM.org or 800.956.2776).