First construction economic indicator of the month

Source: Construction Digital

Date :03/07/2007 13:57:12

Construction activity growth at forty-three month high. Marked rise in employment.

June data from the PMI report on Construction signalled a marked improvement in operating conditions in the sector. Output growth accelerated to its fastest for over three-and-a-half years and new orders also rose markedly. Input price inflation eased slightly and firms remained optimistic regarding future activity levels.

The headline Construction Purchasing Managers’ Index® (PMI)® – a seasonally adjusted index designed to measure the overall performance of the construction economy – rose from 58.0 in May to 60.1 in June, signalling a sharp rise in construction activity.

The rise in total construction activity was underpinned by marked growth across all three sub-sectors covered by the survey. The increase in residential construction remained the fastest.

Roy Ayliffe(pictured), Director of Professional Practice at the Chartered Institute of Purchasing and Supply (CIPS), said:

“Purchasing managers reported another positive month for the construction sector as output growth accelerated at its fastest rate in over three-and-a-half-years. Buoyancy in the sector is being fuelled by a marked rise in the number of incoming new orders, and an increase in demand for residential buildings. However, mounting interest rates continue to place pressure on the sector, which may explain the slight dampening in future business expectation levels.”

Latest data signalled a further marked rise in incoming new orders for UK construction firms in June. The seasonally adjusted New Orders Index rose from 58.9 in May to 63.4, pointing to the fastest rate of new order growth in six years. Almost 49% of survey respondents reported higher new order volumes which they attributed to the successful acquisition of planning permission, in addition to improved marketing activity.

UK construction firms hired additional staff for a twelfth consecutive month in June, with the rate of employment growth accelerating slightly from the previous month. At 57.3, the seasonally adjusted Employment Index pointed to a marked increase in staffing levels. Anecdotal evidence suggested that firms had added to their workforces in response to rising levels of activity and planned new projects.

Average vendor lead-times lengthened further in June and at the most marked rate for thirty-six months. There were reports of stronger demand for raw materials and shortages of some inputs contributing to the deterioration in average vendor performance.

The seasonally adjusted Input Prices Index posted a reading of 68.7 as UK construction firms continued to signal a sharp rise in their average costs. Nonetheless, June’s rate of input price inflation eased slightly from May’s high. There were reports of increased prices for steel, timber, glass and energy.

Sub-contractor usage by UK construction firms continued to rise in June, albeit only marginally. The availability of sub-contractors fell for a fifth consecutive month and at the fastest rate since August 2002. The quality of sub-contracted work was deemed to have deteriorated for a twenty-second successive month, and sub-contractors’ rates rose at the fastest pace in five months.

Panellists remained optimistic regarding levels of construction activity in twelve months’ time. However, the level of optimism among UK construction firms was the lowest in a year as the Future Business Activity Index posted a reading of 71.0. Planned company expansions, increased marketing activity and growth of new orders were expected to boost construction activity over the coming year.

The July Report on Construction will be published on Thursday 2nd August 2007

- The Purchasing Managers' Survey is based on data compiled from monthly replies to questionnaires sent to purchasing executives in 620 industrial companies. The panel is stratified geographically and by Standard Industrial Classification (SIC) group, based on the regional and industry contribution to GDP. The survey is based on techniques successfully developed in the USA over the last 60 years by the National Association of Purchasing Management. It is designed to provide one of the earliest indicators of significant change in the economy, being issued on the first working day of each month. The data collected are not opinion on what might happen in the future, but hard facts on what is actually happening at "grass roots" level in the economy. As such the information generated on economic trends pre-dates official government statistics by many months.

- The Purchasing Managers' Index (PMI) is based on a weighted average of five survey variables including measures of output, new orders, suppliers' delivery times, stocks of items purchased and employment. The individual measures are converted into indexes that vary around 50, a level that indicates no change on the previous month. An index reading below 50 indicates a decline compared with the previous month; above 50 an increase. The individual survey indexes have been seasonally adjusted using the US Bureau of the Census X-11 programme. The seasonally adjusted series are then used to calculate the seasonally adjusted PMI. Where appropriate, please refer to the PMI as the CIPS/NTC Purchasing Managers' Index.

- The Chartered Institute of Purchasing & Supply (CIPS) is the leading international body representing purchasing and supply management professionals. It is the worldwide centre of excellence on purchasing and supply management issues. CIPS has over 42,000 members in 120 different countries, including senior business people, high-ranking civil servants and leading academics. The activities of purchasing and supply chain professionals can have a major impact on the profitability and efficiency of all types of organisation. Purchasing and supply management professionals also control huge budgets and, in the UK alone, collectively spend over £1,100 billion a year.

- NTC Economics is one of the world’s largest specialist providers of business research information. Current activity includes continuous research providing original data on economic conditions in the UK, Germany, France, Italy, Spain, Netherlands, Austria, Ireland, Greece, Russia, Poland, the Czech Republic, Turkey, Brazil, Hong Kong, China, India and Japan. NTC surveys are widely used by governments, businesses and financial markets. www.ntceconomics.com