Category Archives: National Economy

Keep An Eye on the Yield Curve

This is more than a bit wonky. As the U.S. economy hits a new record for economic expansion, the age of the business cycle is making people worry about the next recession. That’s not a bad thing. The longer expansion continues, the closer we are to the next recession. One of the indicators that is getting more airplay these days is the inverted yield curve. I don’t blame you if you can’t get too motivated to get to know this indicator but here’s the thing: an inverted yield curve has preceded the last three recessions and seven of the last eight.

We’re going to devote an article to the yield curve in the July/August BreakingGround but here’s the short-hand version until then.

The yield curve describes the difference between the interest rate on short-term and long-term government loans (or bonds). The long-term bonds should have higher rates because there’s a greater risk of something (like inflation) eating at the money you get repaid as time goes on. When the long-term rates are lower than short-term rates, the yield curve is negative or inverted. There’s a whole technical explanation in BreakingGround (and on the Internet) but the short version is that the yield curve inverts when lots of people are nervous about the economy and invest in long-term bonds with lower rates. The longer this situation lasts (see the red line below the white one below), the more likely that a recession will occur within 6 months to 2 years. It also makes it more likely that the Federal Reserve Bank will cut rates in July. That will make the economy happy, at least for a while.

 

 

 

 

 

 

 

 

PBX reports that March Westin has early bid packages out to bid on the $60 million Hodges Hall renovation at WVU.  The PBX also reports that Al. Neyer will start construction late summer on the $39 million first phase of its new office building at 21st & Smallman.Dick Building Co. was awarded the contract for the $2.7 million TI for Industrious at Liberty Centre. A. Martini & Co. will be doing $1.8 million renovations to PPG Wintergarden’s event space for Bottle Management (the company that developed City Works restaurant). Jendoco Construction has started on the new $5 million exhibit and office for Contemporary Craft in Lawrenceville. Shannon Construction was awarded the contract for the shell and core renovations at Station Square.

Advertisements

Good News on the Economy

The first week of the month is an eventful one for economic data. Last week was no exception. First the Commerce Department announced that total construction spending had declined year-over-year, but was still near all-time record high levels at $1.282 trillion dollars annually. The news that followed was rosier.

The Commerce Department released its first estimate of GDP growth for the January-March 2019 quarter. The 3.2% annualized jump was higher than expected. The above average growth was a turnabout from the talk of recession from earlier this year. There were two notes of caution in the report, however. First, GDP was inflated by an unusual buildup in inventories, which generally means that a following quarter will have lower growth from inventory depletion, There was also a temporary decline in imports, likely resulting from tariffs, which boosted consumption of U.S. goods. The second caution was the 1.3% increase in the sales of domestic goods to consumers and businesses. This suggests that underlying demand is lower than the headline GDP growth.

On May 3, the Bureau of Labor Statistics released its monthly Employment Situation Summary, which found 263,000 jobs had been created in April. Unemployment fell to 3.6%, with the number of unemployed persons falling to 5.8 million. That’s more than one million fewer people than there are jobs open, which underscores the seriousness of the problems that businesses are having with finding workers. In reality, this trend of roughly one million more jobs than workers has existed for a year or so, and it should have slowed the economy by now. Obviously, that hasn’t happened.

Light regional construction news. Research of April’s building permits in Pittsburgh revealed that Cavcon was selected to build Vollmer America’s new $4.8 million building in Findlay Township. PJ Dick has started work on the new $26 million multi-modal garage behind Bakery Square on Dahlem Place. A. Martini & Co. started demolition on the $6.5 million Wabtec TI at 30 Isabella Street on the North Shore.

An Interesting Warning Sign

This may be looking for the dark cloud in the silver lining, but there’s an interesting economic indicator that appears to be a warning about the economy. It’s called the “output gap” and it’s an indicator of how close the economy is to the full potential GDP output. In other words, how close are we to having no more capacity to grow, either because there are no more workers or no more capacity to make things. That’s a pretty accurate description of today’s conditions. The thing that makes this measure worth noting is that a recession has followed the peak of the output gap every business cycle for almost 50 years. The question is: how close are we to peak?

Pittsburgh BAC_2018_07

There is no reason that the economy has to go backwards just because it has when conditions were similar in the past. The most practical and urgent conclusion to draw from the current output gap is that the shortage of skilled workers and capacity could limit the ability of businesses to expand, even if their sales are growing. Adding a new plant or new equipment won’t help you grow if there is no one to occupy or operate it.

A few of the projects that have been in the news lately are either bidding or getting ready to bid. Packages are bidding and have been let by Forest City Enterprises for the $20 million conversion of the Freight House Shops to the UPMC training center. The $45 million Produce Terminal/1600 Smallman Street mixed-use development, being built by PJ Dick, is getting close to construction. Al. Neyer Inc. is preparing to start work on two new buildings, totaling 267,000 square feet at the Clinton Commerce Park in Findlay. There is a $6 million UPMC/Indiana Hospital joint venture cancer center out to bid to AIM, Landau, Massaro, MBM, Mosites, Shannon and Volpatt. New-Belle Construction has started work on a 67,000 square foot warehouse/office in the Technology Drive industrial park in New Stanton.

Construction Inflation Becomes a Problem

Prices for construction materials and products have been creeping up steadily for more than a year. Higher demand pushed supply lines to the limit of current capacity, giving manufacturers the opportunity to raise prices and regain some long-lost profits. Wages likewise have been creeping higher, outstripping the wage gains of the overall workforce. Creeping became “leaping” during the past two months. The first signs of sticker shock are beginning to appear.

All of the gradual price increases have been given a boost by the tariffs levied by the Trump Administration. While it’s worth noting that virtually all of the documented increases happened before the tariffs went into effect, the threat of tariffs gave manufacturers the room to push price increases into the market. That has applied to products that won’t be affected by the tariffs too. Surcharges were beginning to hit the market for tariff-affected items in June, and the impact on producer prices was immediate.

Analyzing the Department of Labor Statistics’ data for May, AGC Chief Economist Kenneth Simonson noted that “the producer price index jumped by 20.0 percent for aluminum mill shapes, 17.4 percent for copper and brass mill shapes and 12.3 percent for steel mill products between June 2017 and June 2018. Other construction inputs that rose sharply in price from May 2017 to May 2018 include diesel fuel, 52.8 percent; lumber and plywood, 18.3 percent; asphalt felts and coatings, 7.5 percent; ready-mixed concrete, 5.5 percent; and paving mixtures and blocks, 5.0 percent.”

The producer price index for inputs to construction industries, goods—a measure of all materials used in construction projects including items consumed by contractors, such as diesel fuel—rose 9.6 percent over 12 months. The year-over-year increase was the steepest since October 2008, Simonson noted.

ppi for construction

This kind of hyperinflation couldn’t come at a worse time for construction in Pittsburgh. Most of the anticipated boom in construction lies ahead. With labor nearly tapped out this summer, specialty contractors are beginning to price projects more cautiously and the result is stressing budgets. The upward pressure comes from several factors. Specialty contractors’ costs are roughly 50 percent labor. With the construction workforce at full employment in Pittsburgh, future work will be done with less people than necessary. Premium time and pay will be used to meet schedules. Contractors will be less certain about the productivity of the labor force. Uncertainty adds risk – and cost. Contractors will also begin to be maxed out on backlog (many already are), meaning that the projects they bid will have higher profit margins on their work. This isn’t greed; it’s simply the response to a shift to a seller’s market.

The results of this unexpected and steep jump in prices for owners will be higher costs for less program and the deferral of some projects for a time. That will chill the boom somewhat. The worse impact will be for contractors – and owners – that are locked into agreements before prices spiked and before projects were bought. If costs rise beyond what the contractors bid, disputes will increase and firms will do what is necessary to survive the inflation. None of those kinds of measures will make for better projects.

The many large private projects that will be built in Pittsburgh over the next 12-18 months have already begun to feel the impact on budgets. That hasn’t been the case in the public market, where bidding remains competitive. God bless the school district that signed big contracts based on bids taken in the past 90 days. They may want to wait until the punch list is complete to celebrate the great bids they received.

Good News About GDP

On Friday, the Commerce Dept. released its first estimate on gross domestic product for the first quarter on 2018. The 2.3% increase was a pleasant surprise, coming on the heels of an upward final revision about the US for the 4th quarter to 2.9%. Recent history has shown weaker first quarters, especially following strong year-end finishes. The first quarter GDP gains came from consumer and business spending growth, although inflation had more of an influence in the growth than in many years. The more troubling data from the estimate was the fact that both consumer and business spending was beginning to trend lower. It remains to be seen whether the additional data gathered for the 2nd and final estimates reinforces that slowing trend in the next two months.

The General Contractors Association of Pennsylvania (GCAP) has published a transcript of its interviews with Gov. Wolf and all three leading GOP candidates for governor. GCAP asked each of the four about their proposed policies that will affect construction. Some of them sort of answered. Read the transcript here.

ScaifeProposed_zpsvgijykjw

University of Pittsburgh’s Medical School is planning a $100 million investment in the expansion and renovation of Scaife Hall. Rendering by Payette.

Project news is light. Pitt is seeking proposals for construction management at risk services for its $100 million expansion of Scaife Hall from PJ Dick, Gilbane, Mascaro, Skanska, Rycon, Massaro, Turner and Whiting-Turner. PJ Dick was selected as general contractor for Providence Point’s $40 million expansion in Scott Township. Cavcon Construction is about to break ground on $3.5 million new Youth & Family Center and Admissions buildings at the Adelphoi Village in Latrobe. NRP Group will be building the Pittsburgh Flats apartments at 23rd and Wharton Streets that was originally proposed by the Edwards Communities. NRP will build 330 units later this year.

Construction Inflation Jumps Again

Bureau of Labor Statistics released information on February’s producer price index (PPI), which showed construction outpacing the overall inflation rate by a considerable amount. Year-over-year (y/y) the PPI for all finished products was up 2.8%. For construction the PPI increase for final demand rose 3.5%.

The AGC’s Ken Simonson noted spikes (note: no declines) in a number of categories. “Materials important to construction that had notable one- or 12-month price changes include diesel fuel, down 2.0% in February but up 38% y/y; lumber and plywood, up 4.4% for the month and 13% y/y; aluminum mill shapes, 2.9% and 12%, respectively; copper and brass mill shapes, -0.9% and 10%; gypsum products, 7.2% and 8.0%; and steel mill products, 2.3% and 4.8%. Among services important to construction, the PPI for truck transportation of freight rose 0.6% for the month and 5.6% y/y.”

feb ppi

In local construction news, CMU’s $45 million Health & Wellness Center – a renovation of Skibo Hall – has gone out for RFP to Jendoco, Mascaro, Mosites, PJ Dick, and Rycon. Construction of a temporary helipad is getting underway as the first phase of the $21 million emergency department renovation. MBM Contracting is the project’s CM. Stantec is the architect. And nearly 20 years of trying, word is that the $40 million Shannon Transit Village is moving forward. The 152-unit apartment with ground floor retail and a 375-car garage is being developed by Jim Aiello (JRA Development) and built by Mascaro Construction. A schedule for construction is not set, however.

Tech Keeps Driving

This morning’s Bureau of Labor Statistics report on February’s job creation blew the doors off the forecast. Employers created 313,000 jobs in February, at least 100,000 more than expected. It’s a reflection of small business confidence in the economy and a reaction to the lower business taxes. Here in Pittsburgh, construction keeps getting a boost from the rapid growth in tech jobs.

job creation history

Rycon Construction was awarded the $7.9 million fit-out for Argo AI, one of Uber’s competitors in the autonomous vehicle game, which is going into 3 Crossings. Dick Building Co. got a contract for about $1 million in renovations for a company called Robotany at the M. Berger Industrial Park in South Side. Robotany grows greens hydroponically and is expanding to put robotics to work planting, feeding and harvesting. Turner is reported to have the $120 million Pitt/UPMC Immune Transplant and Therapy Center, the conversion of the former Ford Building in Shadyside.

In more conventional construction news, Franjo Construction was awarded the $7 million A & L Motors BMW dealership in Monroeville. A permit was issued in McCandless to A. Martini & Co. for a $32 million McCandless Senior Living, being developed by CA Ventures at McCandless Crossing. Burns & Scalo Real Estate has its 150,000 sq. ft. , $34 million Riviera Office Building out to subcontractors for bid. And the $700 million UPMC Heart and Transplant Hospital at Presbyterian is going out for CM proposals (along with the UPMC Hillman Cancer Hospital) to four teams: Clark Construction/Dick Building Co., Massaro/AECOM, PJ Dick/Whiting Turner and Rycon/Skanska.

Correction note:

In the Spring edition of DevelopingPittsburgh, there was an error in the feature article, p. 14. The quote from Mike Coonley should read, “When we have the opportunity we will still put our hat in the ring. We don’t have a lot of available buildings or but we do have lots of sites.” Armstrong County EDC has 20- and 12-acre pads along with several other smaller lots at the 925-acre Northpointe business park. West Hills Industrial Park, at the intersection of SR28 and 422, has 185 acres with multiple sites available.