CommSec Research: Construction jobs growth at 17-month low

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Performance of Construction

  • Construction gauge: The Performance of Construction index (PCI) fell from 54.0 points in May to 50.6 points in June – the 17th consecutive month of expansion, but the lowest level in 17 months. Readings over 50 signify construction sector expansion.
  • Construction employment falls: Construction employment fell by 3.3 points to 48.2 points in June – the lowest level and the first contraction in jobs in 17 months.

The construction activity gauge highlights conditions in the sector as well as providing guidance on the economy more generally.

What does it all mean?

  • The Aussie construction boom continues, albeit at a slower pace. The sector has now expanded for 17 consecutive months, but growth has moderated from the breakneck speed seen 12 months ago.
  • Looking beneath the bonnet, engineering construction expanded for a 15th consecutive month and commercial construction activity expanded for a 14th straight month.
  • Buoyant commercial construction activity, which includes hotels, education/student accommodation and office blocks was singled-out by Alexandra Heath, the Reserve Bank’s Head of Economic Analysis in her speech on the housing outlook in the ‘Gong yesterday. Dr Heath noted: “A lot of the pick-up in non-mining business investment over recent years has been from the non-residential construction category, which includes a range of things like hotels and office blocks.”
  • And the Turnbull government’s $24.5 billion in new major transport projects and initiatives announced in this year’s Federal Budget will continue to support engineering construction work.
  • Large scale government spending on roads, rail and other transport-related infrastructure, together with major commercial building developments have boosted demand for construction workers.
  • Clearly a rebalancing away from residential to commercial construction investment is taking place. Housing activity grew at the slowest pace in 13 months and apartment activity fell for a fourth consecutive month according to AiGroup. This is consistent with the building approvals data released earlier this week. That said, approvals to build new homes bounce around from month-to-month. But the rolling annual total of approvals is still rising, just six per cent below the all-time high. Bottom-line is that the construction pipeline remains full.
  • According to the Bureau of Statistics, a total of 140,400 construction jobs were created over the 3 years to May (latest available). However, jobs declined by 20,000 over the 3 months to May. And today’s PCI employment sub-index supports this evidence of a slowdown in jobs creation with a contraction for the first time in 17 months. That said, wages growth still remains elevated with AiGroup citing “…heightened demand for construction workers over the past year and difficulties in filling various skilled vacancies.”

What do the figures show?

Performance of Construction index (PCI)

  • The Performance of Construction index fell from 54.0 points in May to 50.6 points in June. Readings over 50 signify construction sector expansion. The index has expanded for 17 consecutive months, but it was the lowest reading since January 2017. The pace of growth has moderated since July 2017 when the index peaked at 60.5.
  • The key sub-sectors of the index were mixed in June:
    • Housing activity fell by 8.4 points to 50.2;
    • Apartments activity rose by 1.6 points to 48.4;
    • Commercial activity rose by 1.1 points to 53.7;
    • Engineering activity fell by 4.8 points to 51.0.
  • The rate of capacity utilisation in the construction sector fell by 4.2 per cent to 71.3 per cent – the lowest level in 17 months; Construction employment fell by 3.3 points to 48.2 – the first contraction in 17 months; Construction wages fell by 6.2 points to 60.7 – the lowest level in 8 months; Input prices fell by 4.9 points to 77.7 – above the 12-month average of 76.3; New orders fell by 5.2 points to 49.7 – the lowest level in 6 months. Deliveries fell by 1.7 points to 55.0;Selling prices fell by 6.9 points to 53.5.
  • AiGroup wrote: “Australian PCI data for June pointed to a moderation in activity growth across the construction industry. Demand conditions were also more subdued with the new orders index drifting into mild negative territory following five months of expansion. June’s decline in aggregate industry demand led to a slower rate of increase in deliveries from suppliers while employment contracted for the first time in 14 months.”

What is the importance of the economic data?

  • The monthly PCI is released by AiGroup and the Housing Industry Association. The PCI provides guidance on construction activity and is important for construction and construction-related businesses.

What are the implications for interest rates and investors?

  • Infrastructure-related construction work is booming across the nation. And the construction sector will remain a key contributor to the Aussie economy in 2018/19. However, Dr Heath noted: “Liaison contacts have suggested to us that capacity constraints in the construction industry, particularly in NSW, will make it difficult for construction activity to increase.”
  • While the residential construction boom has peaked, dwelling investment still increased (up 0.9 per cent) in the March quarter. And strong population growth may cushion the impact of rising apartment supply.
  • With infrastructure spending and home building soaring, construction companies have found it difficult to attract and retain staff. However, it appears that job creation is slowing from unsustainable levels with SEEK construction job ads up just 4 per cent over the year to May.
  • But there is still some upward pressure on input costs and selling prices. The question is how much of the wage and cost pressures will spill over to other industries.
  • CommSec expects no change to official interest rates until at least early 2019.

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