Construction slump points to economic downturn

The Australian Industry Group (AiG) - Housing Industry Association (HIA) Performance of Construction Index (PCI) reveals that building activity fell sharply in May, after also falling heavily in April.

The index now stands  at a paltry 36.9 - well below the benchmark number of 50 that separates an expanding industry ?from: http://www.building-materials-china.com/? from a contracting one.

This is the lowest result and the sharpest monthly fall in the index's two and a half year history.

The previous sharpest fall was the month before.

Time warp

These figures stand in stark contrast to Australian Bureau of Statistics (ABS) data released on Wednesday.

The official figures showed stronger than expected economic growth, with Gross Domestic Product (GDP) expanding by 0.6 per cent, compared to a Reuters poll of economists on average forecasting 0.3 per cent growth.

However, the ABS figures were quarterly figures from the three months to March, whereas more recent data continues to show weakness in most major sectors of the economy, except those related to mining and energy.

The AiG's associate director of economics (from: http://www.building-materials-china.com/buy-economics/) and research, Tony Pensabene, said: "Contrary to recent reports of the construction industry holding up, this leading indicator of the industry signals that higher interest rates, tighter liquidity, and lower confidence levels are having a broad based impact on activity.

"The results, which are up to three months ahead of official data, show that weakness in the industry has intensified, with reductions in activity extending beyond house building and apartments to commercial and engineering construction."

This conclusion is supported by recent official profit figures which showed an 18.1 per cent fall in seasonally adjusted construction profits for the quarter year to March.

Monthly ABS building approvals statistics have also showed a decisive shift lower, dropping 1.3 per cent in April in trend terms.

This was despite a 7.8 per cent rise in the seasonally adjusted figure for April, which was mainly attributable to large surge in the volatile apartment sector, where a few large developments can skew the figures in any given month.

Retail sales have also declined in the months since the GDP data was collected, with a modest rise in March offset by an equal fall in April, leaving the trend growth in retail sales flat-lining at 0.0 per cent.

The retail (FROM: http://www.building-materials-china.com/buy-retail/ )figures are widely used as a more current indicator of the economy, because retail spending is often the first area where consumers will cut back when they feel the hip-pocket pinch.

The underlying question is which data to believe - the time-lagged, but comprehensive, official GDP figures, or more current private and official monthly indices operating on smaller samples (the PCI surveys 120 companies).

Big falls

Probably the greatest factor lending weight to the dire findings of some monthly surveys, such as the PCI, is the sheer scale of the declines.

Even allowing for possible deficiencies in the data, it is hard to imagine the index being so far off the mark as to cast doubt on the conclusion that construction is in the midst of a steep decline that began around the start of the year.

The other particularly worrying findings of the index were that new orders had fallen sharply, and that construction

 (FROM: http://www.building-materials-china.com/buy-construction/ )employment had fallen for the second month in a row.

The new orders sub-index is at 36.1, which is the lowest result for incoming work in the PCI's history, causing concern for builders given the considerable time lags between orders and completion in construction.

"Of concern, new orders for the industry as a whole are now at their lowest level in almost three years, which means that the current weakness in activity is likely to persist during the months ahead," Mr Pensabene said.

The fall in employment also seems to indicate construction companies' belief that the decline is not a short-term aberration as they reduce costs by cutting staff.

The report's authors have attributed the falls in activity to higher interest rates, food bills and fuel (http://www.building-materials-china.com/buy-_fuel%2520/)costs impacting on consumer demand, as well as the rising cost to industry of fuel and building materials, such as steel.

The HIA's chief economist Harley Dale said that these pressures are likely to become more apparent in the next set of ABS figures for the June quarter.

"A weak March quarter for residential construction indicators will be compounded by an even softer June quarter," he said.

The Reserve Bank and expectant borrowers will have to wait until September 3 for the next set of detailed official GDP figures to either confirm or refute the recent evidence of a slow down.