Construction PMI mired in recession

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The AIG construction PMI is still mired in recession:

Construction sectors: Apartment building (28.6 points trend) remained the weakest performing sector, declining for an 11th consecutive month and at a rate that was broadly unchanged from January. The house building sector (35.2 points trend) also remained in negative territory with its rate of contraction the most marked in almost six and half years. Commercial construction (42.2 points trend) fell for a seventh month and at a slightly steeper rate than in January. This coincided with a further weakening in demand, although conditions are mixed with growth opportunities noted by respondents in some key commercial and social building project areas. The weak patch for engineering construction (43.9 points trend) continued with the sector recording a third month of contraction and the lowest activity reading in just over three years.

Construction prices and wages: Although strong cost pressures continued to be exerted in the construction of building projects in February, the input prices index decreased by 5.9 points to 68.7 points, indicating that input price inflation moderated somewhat during the month. The selling prices sub-index in the Australian PCI® decreased by 3.5 points to 40.7 points in February, signaling a slightly slower rate of contraction in output prices. However, this negative reading continues to indicate that rising input prices and other costs are not, on average, being passed on to customers, reflecting the strong competition among builders in securing work. The on-going gap between these price series in the Australian PCI® demonstrates that profit margins remain tight for many businesses in the construction industry.

Construction activity: Across the overall construction industry, both activity (41.6 points) and new orders (43.2) continued to contract in February with on-going softness in new orders likely to act as a headwind to stronger activity over coming months. In response to this weakening in demand conditions, businesses reported a steeper fall in deliveries of inputs from suppliers (45.4 points) while employment continued to contract (46.0 points), albeit at a slower rate.

Construction highlights: Across the residential construction sectors, the downtrend in approvals from historic highs is continuing to weigh on overall industry conditions. Commercial construction is also detracting from industry-wide performance. Businesses operating in the engineering construction sector have experienced a much weaker uptake of new work in recent months reflecting a shortfall of new contracts to replace completed work. This could be related to delays to some stages of existing projects or time lags between the development and construction of new infrastructure projects.

Construction concerns: Australian PCI® survey respondents continued to indicate on-going pressures from a highly competitive tendering environment and tight margins. Cost pressures in the delivery of construction projects also remains a concern for many constructors due to elevated energy costs and supplier price rises, some of which are related to the strength in commodity prices.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.