9 Economic Indicators that Construction Professionals should know
Practically any and every commercial operation in any economy is executed under some kind and form of construction – making construction the pulse of every economy’s heartbeat (Educational facilities have to be built to enable commerce, roads, commercial offices, shopping malls, sea ports, air ports, dams, houses, train tracks etc). This makes construction the economic health indicator of the South African economic performance. The industry is a significant contributor to employment and economic growth through significant direct and indirect multiplier impacts
Of all the sectors on the JSE, the building and constructions sector is probably the most cyclical and the most volatile. Economies throughout the world have been revitalized through intensive construction infrastructure projects and programmes. Although the country is currently experiencing unprecedented contraction in the industry, the cyclical upturn could be dramatic with just necessary stimuli.
It is therefore important for Construction Professionals to keep tabs on the industry.
Here is a list of key indicators that will assist professionals keep their fingers on the pulse of their industry.
1. Gross fixed capital formation.
It is a component of the Expenditure method of calculating GDP. It refers to net investment in fixed capital which includes money spent on improvements to land, equipment purchases, and road and building construction.
Why does it matter? According to OECD data, GFCF in China has been expanding steadily at between 6.5 and 10% annually over the past few years. In 1992 it surged 75% and we all know what the Chinese economy has done since. And going back three decades it has never contracted. This helps to explain why China is the world’s No. 2 economy.
2. Selected building statistics of the private sector as reported by local government institutions
This is monthly statistical release contains information derived from the building statistics survey covering a sample of local government institutions involved in the approval of building plans and in the final inspection of buildings completed for the private sector.
Why does it matter? It is an indicator of building activity in the private sector.
3. Purchasing manager’s index (PMI)
The Purchasing Managers’ Index (PMI) is an indicator of the economic health of the manufacturing sector. The PMI is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. It is published monthly
Why does it matter? It is measure of economic activity in the country – an index for which a value of 50 indicates no change in the activity, a value above 50 indicates increased activity and a value below 50 indicates decreased activity.
4. Producer price index (PPI)
The Producer Price Index (PPI) is used to measure the change over time of the average price of goods produced domestically.
Why does it matter? PPI of finished goods is a direct indicator of the near-term level of the Consumer Price Index (CPI). This is because changes in prices at the retail level (finished goods) are directly transferred to consumers at the point of sale. Since the CPI is the primary indicator used to measure inflation in an economy, the PPI is a preview of changes in the rate of inflation.
5. Utilisation of production capacity by large enterprises
This is a quarterly statistical release which contains historical information regarding utilisation of production capacity, total under-utilisation and reasons for under-utilisation according to manufacturing divisions.
Why does it matter? It is a good indicator of business and market conditions as when times are good most plants are able to run at close to 70-80% capacity utilization and in some cases all the way up to 100%.
6. Building cost index
This is a measure of the percentage change in average building costs in South Africa. It is based on an analysis of the tariffs (rates) in accepted tenders supplied by quantity surveyors (QS).
Why does it matter? It is an indicator of trends in tender prices.
7. Gross domestic product (GDP)
GDP represents the monetary value of all goods and services produced within a nation’s geographic borders over a specified period of time.
The equation used to calculate GDP is as follows:
GDP = Consumption + Government Expenditures + Investment + Exports – Imports
Why does it matter? When GDP declines for two consecutive quarters or more, by definition the economy is in a recession. Meanwhile, when GDP grows too quickly, and fears of inflation arise.
8. Civil confidence index
Business sentiment among Civil Engineering contractors. The index can vary between a maximum of 100 (which indicates that all respondents were satisfied with prevailing business conditions) and a minimum of zero (indicating that all respondents were unsatisfied). A level of 50 indicates that the respondents are equally divided between those satisfied and dissatisfied.
Why does it matter? It reflects the state of business conditions in the Civil Engineering industry
9. CIDB SME Survey
Business tendency survey results that reveal information on the current state of affairs among registered CIDB contractors (Grades 3 – 8) operating in the building and civil engineering industries
Why does it matter? The survey results not only reveal earlier developments in activity, employment etc. (for which official figures are published), but also provide unique information, such as business confidence, tendering prices, business conditions, constraint indicators and respondents’ expectations (or forecast) for the next quarter.
These indicators should also assist when making any career decision, another reason for Construction Professionals to have their fingers on the pulse of the industry.