Executive Observations
Over the course of the last quarter, Ariba’s customers conducted site development projects with general contractors, capital equipment engagements for HVAC and forklifts, and services projects for equipment maintenance. These projects were representative of the most commonly addressed categories during this time period.

The continued development towards a full-blown recession in the U.S. economy is creating an increasingly challenging work environment. The construction industry and capital goods markets are currently characterized by:

• Reduced demand and higher costs due to increased raw material prices
• Continued recession in the residential construction market with the non-residential market starting to follow suit
• Tighter lending requirements limiting funding and budgeting for new construction
• Limited spend available for capital goods investments in both the private and public sectors

Third Quarter Observations
The construction industry continued to suffer as a result of two market forces: reduced demand due to the current financial market situation, and construction cost increases stemming from raw material price hikes. The combination of these market conditions made it increasingly challenging for contractors to operate with sustainable profitability.

The overall construction cost index has increased six percent compared to the same time last year. According to Turner Construction Company’s Building Cost Index, commercial building costs rose almost two percent in the third quarter over the second quarter, and construction costs are currently rising more rapidly than the general Consumer Price Index. The significant increases experienced are largely explained by price surges for construction materials, such as steel and non-ferrous metals, as well as petroleum-based products and energy. Buyers felt some relief when material cost increases were mitigated by increased competition among contractors scrambling for reduced opportunities.

The slump in demand was directly reflected in decreased construction activity. Overall activity levels were down almost five percent compared to 2007 numbers, and this downturn now represents a significant drag on the U.S. economy. The slowdown is primarily driven by further declines in the private construction market, where housing construction continued its downfall. Builders were aggressively cutting back production as a means to mitigate the declining housing demand, while mortgage foreclosures continued to add properties to a market already suffering from supply overload. Overall, activity in the housing market fell for the sixteenth consecutive month, and levels dropped to the lowest levels seen since 2001, the start of the last recession.

In July, non-residential activity fell for the first time since December of 2007. Non-residential construction activity had helped offset some of the declines in the residential sector, but now this sector is declining as well. The main reason for the decline was tightened lending policies for funding of non-residential projects, which impacts new construction of factories, plants, schools, health care facilities, etc. Despite this trend, public construction projects maintained slight increases as spend for federal, state, and local building projects all rose. Construction of industrial buildings and hotels/motels also reported positive numbers.

U.S. Focus

by Nicoleta Diaconu