FREIGHT VOLUMES ARE SLOWLY EXPANDING

Homeowners and building owners cut back on maintenance activities during the Great Recession as their balance sheets weakened, but that delay is now resulting in moderate acceleration in freight volumes for building materials. Even as new construction activity remains at depressed levels, the demand for building materials products is being driven by a depreciation of existing structures — both residential and private nonresidential buildings.

The combination of increasing depreciation and improving homeowners' and building owners' balance sheets will increase maintenance activities this year, stimulating consumption of building materials. In November 2011, building materials/garden equipment and supply retailers' sales (adjusted for inflation) were 4% higher than in November 2010 (Chart A). The increase in retail sales of building materials products is pulling commodities from upstream in the supply chain of both wholesalers and producers.

In October 2011, wholesale sales of hardware, plumbing and heating products were 5.1% higher than the same period a year earlier, and wholesale sales of lumber and building materials were 8.7% higher. In November, output of construction supplies was 3.7% higher than the same period in 2010 (Chart B). Consumption of these products is pulling building materials products through the supply chain (from producers, to wholesalers, to retailers, to end users) since inventories are in equilibrium throughout.

The downturn in new residential and private nonresidential construction activity has bottomed out, but market conditions — excess supply, soft demand and tight credit availability — imply a sluggish recovery. In 2012, housing starts will remain at depressed volumes as the supply of existing homes for sale remain at high levels as home foreclosures keep downward pressure on prices. A sluggish recovery is predicted for private nonresidential construction activity as vacancy rates keep downward pressure on rents. In addition, sluggish employment gains imply capacity will be slowly absorbed.

Over the past few years, new residential and private nonresidential construction activity has dampened the freight volumes of building materials, but this is no longer the case. Private nonresidential construction activity will gradually increase this year; residential construction activity may also increase. Freight volumes of building materials upstream in the supply chain were further weakened by retailers and wholesalers partially satisfying weak sales by drawing down excessive inventories. Inventories are now in equilibrium, so inventory liquidation will no longer be a drag on freight volumes.