ABI Falters, US Construction Employment Growth Remains Fragile

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Source: Jeff Yoders/MetalMiner

The Architecture Billings Index slowed down in August after showing mostly healthy business conditions so far this year. An economic indicator of construction activity, the ABI reflects an approximate 9 to 12-month lead time between billings by design firms and construction spending.

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The American Institute of Architects (AIA) reported the August ABI score was 49.1, down from a mark of 54.7 in July. This score reflects a decrease in design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 61.8, down from a reading of 63.7 the previous month.

Employment Up, Billings Down

Construction employment has been generally healthy in the US this year. Employment on construction projects increased in 163 of 358 metro areas in August compared with year-ago levels, but it fell in nearly as many with 153 showing a loss over the previous year, according to the Associated General Contractors of America report. Florida’s metro areas saw an increase of 7%, while 2 Texas metro areas saw steep declines.

The recovery in construction employment looks every bit as fragile as that of the overall economy. Fixed-asset investment growth in China served as the key growth engine across the broader basic materials space for roughly the last 15 years.

Morningstar: US Construction a Safe Haven

With that growth engine sputtering out, pockets of growth in the basic materials sector, including metals, have become scarce. Morningstar‘s outlook for residential and nonresidential construction in the US points to an attractive long-term growth story. Really? Why?

Morningstar admits that the basic materials sector is still trading below its analysts’ aggregate fair value estimate at a price/fair value of 0.95 on an equal-weighted basis.

They also qualify that, as a result of the deceleration of fixed-asset investment growth in China, Morningstar analysts’ sector outlook points to limited price appreciation for most commodities through the end of the decade.

Better Domestic Prospects

Still, equity analyst Andrew Lane writes for Morningstar that “investors can look to exposure to US construction spending for more attractive growth prospects. The coatings, lumber, aggregates, cement, and steel industries are likely to be relative winners given our expectation for improving US construction.”

The “relative winner” concept in a down market certainly fits the bill. US construction demand is still strong. US home sales are rising and commercial construction is still growing steadily if not spectacularly.

Yet, it’s still difficult to envision US construction materials offering much more than shelter from the storm going on in China right now. Chinese growth and urbanization fueled a boom in construction there that we likely won’t ever see again.

China Reduces Home Down Payments

Beijing is doing its best to revive its slumping construction sector.

On Wednesday the central government said it will cut the minimum down payment level for first-time home buyers in many cities, step up support for the sluggish property market.

The central bank and banking regulator said they would be lowering minimum down payments for first-time home buyers to 25%, from the previous 30%, in cities that do not have restrictions on purchases.

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We hope US construction continues to expand and outpaces its current slow rate of growth, but don’t expect a major turnaround in markets such as structural steel, aluminum and copper.

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