Up and at 'em

01 The state of play

Official statistics suggest industry output is at a record high and this buoyancy continued to be reflected in contractors’ enthusiastic responses to Experian Business Strategies’ monthly survey. After prolonged growth, speculation inevitably surfaces about the threats that may destabilise the industry. One such risk is that the housing market is not sustainable and that a sharp correction is on the cards, especially as the risk to interest rates is the highest in five years.

However, while these threats cannot be ignored, in the current environment they are unlikely to dampen the industry’s confidence. The responses to our survey certainly support this viewpoint. In May the overall activity index rose by one point to 61. The orders index fell marginally, but remained high, suggesting that order books continued to be healthy for the time of year. The other forward looking indicators, tender enquiries and employment prospects, were also strong in May. The non-residential tender enquiries index increased by six points from April to 64 while the employment prospects index stood at 55 after dropping one point.

The non-residential was the strongest; three out of four of its indicators increased during the month. Its activity index reached 64, five points higher than in April, and the orders index climbed six points to 79. However, it was the strength of non-residential tender enquiries that stood out. The non-residential tender enquiries index reached an all-time high of 73. Changes to the residential sector’s indicators were more subdued and its position remained relatively strong. Civil engineering was weaker than a month ago.

02 Leading construction activity indicator

According to the leading activity indicator, a short-term forecasting model, the outlook for the construction industry remains strong, but some slowing in the rate of growth will not come as a surprise. From 62 in May, the short term indicator is forecast to fall to 59 in June, and to drop a further point in August.

(The indicator uses a base level of 50 – above that level shows an increase, below that level a decrease).

03 Labour costs

In April, for most respondents in the residential, non-residential and civil engineering sectors, annual labour cost inflation was 5% or less. Such levels were reported by 67% of civil engineering and 70% of residential and non-residential respondents. Labour cost inflation of more than 7.5% was not reported by any civil engineering firms, but 15% of building firms encountered a cost burden of this size.

Respondents were last quizzed on the level of labour cost inflation they faced three months ago and, since then, inflation in the civil engineering sector has moderated. On the building side, however, labour cost pressures have intensified and, for many respondents, annual labour cost inflation was much higher than three months ago.

04 Regional perspective

Regional composite indicators, incorporating activity, orders and tender enquiries from the past three months, provide a measure of the relative strength of each region’s construction industry. This month’s results suggest there was something of a North/South divide in May. The southerly regions saw their regional composite indicators rise, while declines were common in their northern counterparts.

Indicators for the South-east and South-west climbed by one point to 65 and 69 respectively, while falls were seen in Scotland, the North-west, Yorkshire and Humberside, the West Midlands and East Anglia.

Northern Ireland is in the midst of a construction boom, and was the star regional performer in May. Its indicator climbed by nine points to 87, a record level for the region itself and particularly significant considering that no other region’s indicator managed to scrape past 70.

Apart from Northern Ireland’s robust performance and marginal increases in the South-east and South-west, Wales was the only other region to see its indicator rise in May. It climbed by five points to 62.

For Yorkshire and Humberside’s industry, May was a weaker month. Its indicator dropped below 50 for the first time since April 2006. Although a value of 49 is on the borderline, construction activity is unlikely to have increased during the month.