1. Sorting Out the Outlook for Construction and Materials Transportation Estimators Assn., St. Louis Prepared October 3, 2007 Ken Simonson Chief Economist Associated General Contractors of America simonsonk@agc.org

2. Current economic influences Moderate real GDP growth (2-3%) Low inflation (CPI change 1.5-2.5%) Moderate job growth, low unemployment (avg. 150,000 jobs/mo., 4.6% unem rate) Rising real wages, personal income (2%) Worries about housing, credit, falling dollar

3. The shifting construction market Segment20068/07 Total (tril. $, SAAR)$1.19$1.17 % of total Private residential54%45% New SF3526 New MF 4 4 Improvements1415 Private nonres.2530 Public2125

4. Current housing situation Aug. spending: -1.5% vs. Julye, -17% vs. 8/06 Aug. permits: -5.9% vs. July, -24% vs. 8/06 Aug. starts: -2.6% vs. July, -19% vs. 8/06 Aug. new-home sales: -8% vs. July, -21% vs. 8/06 Aug. jobs: -23,000 vs. July, -155,000 vs. 8/06 Inventories, time on market remaining high

5. Single-family (SF) vs. multifamily (MF) Aug. construction spending (value put in place): SF: -3.3% vs. July, -26% vs. 8/06 MF: -0.3% vs. July, -5.3% vs. 8/06 August housing starts : SF: -7.1% vs. July, -27% vs. 8/06 MF: +13% vs. July, +14% vs. 8/06 August building permits : SF: -8.1% vs. July, -28% vs. 8/06 MF: unchanged vs. July, -15% vs. 8/06

6. Housing outlook SF: No end yet to decline in permits, starts or spending Don’t expect upturn before middle of ‘08 MF: Rental construction cushioned the fall in condo starts but now many owners are trying to rent out houses and condos Rate cut helps some buyers/homeowners but won’t cure credit fraud worries

7. Nonres ’06 totals, shares, ’07 YTD change Nonresidential total $545 billion 100%+14% Educational $86 billion 16%+14% Commercial $76 billion 14%+15% Highway & street $72 billion13%+ 5% Office $55 billion 10%+21% Healthcare$40 billion 7%+15% Power $39 billion 7%+22% Manufacturing $34 billion 6%+ 6% Transportation$27 billion 5%+11% Sewage & waste disposal$23 billion 4%+ 6% Communication$21 billion 4%+20% Amusement & recreation $18 billion 3%+ 9% Lodging$18 billion 3%+64% Other7% (water; public safety; religious; conservation)

8. Nonresidential segments (listed in descending order of public + private spending in 2006) Jan-Aug ’07 year-to-date (YTD) share and growth from Jan-Aug ’06 to Jan-Aug ‘07 Major influences Outlook for ’07 and ’08

9. Educational 16% of public + private nonres. spending YTD; YTD change Jan-Aug ‘06 to Jan-Aug ‘07: 14% Falling primary school enrollment; rising high- school, college, continuing ed K-12 affected by property taxes, house values Private school/college spending affected by stock market (through endowment return, gifts) 2007 forecast: 9-11% (record bond issues in ‘06; momentum from 2005-06 revenues; stock gains) 2008 forecast: 3-6% (slower revenue growth)

10. Commercial (retail, warehouse, farm) 14% of YTD total; 15% YTD growth Led by multi-retail (gen. merchandise, shopping centers, malls), 16% YTD growth Neighborhood retail follows new housing; other segments affected by home sales or remodeling: furniture, appliance, yard/garden sales 2007: +8-10% (personal income still rising but less new local, auto-, and housing-related) 2008: +4-7% (expanding GDP but tighter credit)

11. Highway and street 12% of YTD total; 5% YTD growth Boosted by 8/05 passage of SAFETEA-LU CBO projects big deficit starting 10/08 2007: +5-8% (flatter fuel tax receipts, slight relief on materials costs) 2008: 0-5% (depends on receipts, costs)

12. Office 11% of YTD total; +21% YTD growth Rebound from weak 2001-05 Vulnerable to reduced demand from RE agents, mortgage brokers, title companies Tighter credit; large-firm mergers, job cuts threaten many large-office markets 2007: +10-14% (leveling of vacancy rates, modest job growth) 2008: +0-5% (’06 projects end, fewer new)

13. Power 8% of YTD total; +22% YTD growth Private electric power has ended 5-year slump: +22% YTD growth; public +26% New plants, transmission lines; retrofits Wind, solar growing but from small base 2007: +20% (retrofits, new plants, alternatives) 2008: more of the same (+15-25%)

14. Healthcare (hosp., med. bldg., special care) 7% of YTD total; +15% YTD growth Led by private hospitals, 16% YTD growth Technology, new housing driving hospital (re)construction; seismic retrofit in CA Budget constraints, decline of employer- funded care may slow hospital demand 2007: +12-15% 2008: +10-15%

15. Manufacturing 6% of YTD total; +6% YTD growth Catching up from 1998-2004 slump Strong shipments, high capacity utilization Long lead times on refineries, mining, cement plants; aircraft, heavy equipment 2007: +5-10% (less automotive, pharma; more export-oriented plants, foreign inv.) 2008: 4-8% (big jobs continue; fewer new)

16. Transportation facilities 5% of YTD total; +11% YTD growth Driven by growth in passengers & freight Slower economic growth in 2007 implies less expansion 2007: +5-8% (trucking, rail slowdown) 2008: +5-8% (more airport, port work)

17. Lodging 5% of YTD total; +64% YTD growth Driven by higher room and occupancy rates; likely to flatten by end of ‘07 Rebound from 2000-01 recession, post- 9/11 travel slump 2007: +40-60% (more growth in business, leisure, foreign travelers) 2008: -5 to +5% (depends on credit)

18. Communication 4% of YTD total; +20% YTD growth Carriers consolidating but also upgrading 2007: +15-20% 2008: +10-15% (same trends continue)

19. Sewage & waste disposal 4% of YTD total; +6% YTD growth Housing slump means fewer new lines Major plant and CSO upgrades 2007: +4-6% 2008: +1-5% (continued housing impact)

20. Amusement & recreation 3% of YTD total; +9% YTD growth Very diverse: sports venues, playgrounds, parks, convention centers, theaters 2007, 2008: ? (big stadium projects, bond issues passed in 2006 but flatter public revenues)

21. Materials and components Higher increases until recently for construction inputs than for overall economy: 12 mo. to: 12/0412/05 12/06 8/07 Const PPI 9.1% 8.2% 4.6% 1.6% CPI-U 3.3% 3.4% 2.5% 2.5% Higher cumulative change from 12/03 to 8/07: Const PPI 28% CPI-U 13% PPI drivers: steel, gypsum, diesel, asphalt, concrete, copper, plastics, aluminum, wood

22. Cumulative Change in Consumer, Producer & Construction Prices (All PPIs = 100 in 12/03) 08/07

23. Cumulative Change in PPIs for Construction Types (All PPIs = 100 in 12/03) 08/07

24. Cumulative Change in PPIs for Selected Highway Inputs (All PPIs = 100 in 12/03) 08/07

25. Cumulative Change in PPIs for Selected Building Inputs (All PPIs = 100 in 12/03) 08/07

26. Cumulative Change in PPIs for Selected Metal Products (All PPIs = 100 in 12/03) 08/07

27. Outlook for materials (3-6 months) Falling prices: wood, gypsum products; perhaps plastics Likely to rise: diesel, asphalt, copper No shortages but longer lead times for some items Year-over-year PPI change: 3-5%

28. Outlook for materials (1-5 years) Construction remains dependent on specific materials Same materials in demand worldwide, with uncertain supply growth (e.g., copper, oil) Construction requires physical delivery Thus, industry is subject to price spurts, transport bottlenecks, fuel price swings Expect 6-8% PPI increases, higher spikes

29. Construction labor costs, availability Average hourly earnings, 8/06-8/07: +4.5% Construction employment change: -1.2% -Residential construction : -4.5% (residential building & specialty trades) -Nonresidential construction: +1.5% (nonres building & specialty trades, heavy & civil engineering const.) Architectural, engineering services: +2.9% Nonfarm total: jobs +1.3%, wages +3.9%

30. Construction labor outlook (12/07 vs. 12/06) ‘Official’ rise in nonres. employment: 2-4% ‘Official’ decline in res. employment: 4-6% + 400-500K ‘res’ specialty trades in nonres = Actual nonres. employment rise: 11-16% Actual res. employment loss: 16-20% Wage increase: 5% (partly due to greater proportion of nonres., hence higher-paid)

31. Summary for 2007 Total const. spending: -6% to -3% Res: -15% to -20% (huge drop in new SF; MF and improvements down slightly) Nonres: +10-15% (led by energy & power, hospitals, lodging) Materials costs: +3-5% Dec.-Dec. Labor costs: +4.5-5.5% Dec.-Dec.

32. Summary for 2008 Total construction spending: +1-5% Res: +1-3% (turnaround after mid-2008) Nonres: +3-7% (led by energy & power, hospitals; weaker highways, lodging) Materials costs: +6-8% Labor costs: +5-6%

33. AGC Economic Resources (sign up by email to simonsonk@agc.org) The Data DIGest: weekly one-page email PPI tables: emailed monthly Construction Inflation Alert: Oct. & March Audioconferences: Dec. & June State-specific emails (timing varies) and fact sheets: www.agc.org /factsheets

34. Ken Simonson Chief Economist Associated General Contractors of America simonsonk@agc.org, 703-837-5313