Industry Overview

Industry Overview:

The construction industry:

Introduction:

The construction industry is one of the industries in the US that provides employment to the entire population, this sector engages in activities such as home building, construction of engineering projects such as highways and bridges, they also perform such other activities as repair work, this industry provides a high percentage of GDP to the economy and therefore this industry is an important sector in the economy.

This industry is associated with the housing market which is well known for the creation of market bubbles, market bubbles can be defined as the steady increase in the price of an asset and the end of the bubble is a bubble burst, at this point the price of the asset which in this case is houses, the prices will rise to a point where the bubble burst and the price of the asset is almost zero. This paper discusses the construction industry in reference to the real GDP, employment and unemployment levels, inflation, interest rates and S$ P 500.

Real GDP

The construction industry is one of the major industries in the united states, it provides a large amount of GDP to the economy and also promotes the growth of the economy in terms of increased GDP level, this occurs due to increased employment, infrastructure construction that supports investment and businesses, therefore the construction industry is very crucial in terms of its contribution to the growth in GDP.

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The industries production level is added to the other sectors when determining the GDP level of the economy, therefore if the construction industry increases its production level then eventually this will lead to an increase in the level of GDP, the real GDP is calculated by adjusting the GDP level with the level of inflation in the economy.

The unemployment rate

The graph below shows the rate of employment in the construction industry over the years, the rate of employment in this industry has increased over the years, this has led to increased employment opportunities in the industry, data was retrieved from http://data.bls.gov/PDQ/servl et/SurveyOutputServlet?&series_id=CEU2000000001

The industry has also caused unemployment in the economy; the following graph shows the employment rates in the industry for those who were currently working in the industry.

From the graph it is clear that the industry unemployment rate has increased from the year 2000 to the year 2003 but declined from that point forward to 2006, this is a good indicator in that the industry has reduced the rate of unemployment in the entire economy. Data was retrieved from http://data.bls.gov/PDQ/servlet/SurveyOutputServlet?&series_id=LNU04032231

The data on unemployment shows the level of employees who were previously employed in the construction industry and on the year were laid off from work, the decline in the unemployment

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level in the recent years shows a reduction in the level of unemployment in the economy, increased employment will eventually lead to increased growth in the GDP as income per capita increases and the demand for goods and services increases as a result of this increase in income, therefore the reduced unemployment level can be seen as a way in which the level of unemployment in the economy has reduced.

The inflation rate as measured by the consumer price index (CPI)

The consumer price index is used to calculate the level of inflation in the economy, an increase in the cost of production of a product in the economy may lead to increased inflation in the entire economy, example an oil shock will lead to inflation in the whole economy because oil is an input either directly or indirectly to all the industries in the economy, therefore the increase in the cost of production in the construction industry will lead to inflation in the economy.

Below is the producer price index for the construction industry in the US, data was retrieved

from http://data.bls.gov /PDQ/servlet/SurveyOutputServlet?&series_id=PCU236221236221&output_view=pc t_12mths\

Year

Jan

Feb

Mar

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Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

2006

7.7

7.6

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7.8

7.7

7.6

7.6

6.6

6.5

6.4

8.1

8.2

8.1

2007

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7.7

7.7

7.5

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From the above table we can note that in the year 2006 there was an increase in the cost of construction and this caused the PPI for the construction industry to rise, as a result of this the industry may have caused inflation in the economy as a result of what isd known as the cost push inflation, this industry itself may have caused a rise in the inflation level in this period. Therefore the rise in the PPI is also an indicator of the inflationary pressure it causes to the entire economy.

The PPI has reduced in the first months of 2007, this is a good sign as the industry in the recent past has not led to inflation in the economy, however if prices of other goods and services in the economy rises then this will result to an increase in the cost of production in the construction industry. Therefore this decline is a positive indicator of the smooth running of the construction industry as it has not caused inflation to the economy.

Interest rate:

When interest rates rise in the economy the cost of borrowing funds will rise, most finished constructions are purchased through borrowed funds and therefore a rise in the interest rate will reduce the level of purchases in the industry, furthermore the construction industry also require this borrowed funds to finance their operations and therefore if the interest rate rises then the industry will find it hard to operate in the economy.

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The interest rates in the economy have declined, this has led to the increased investment and growth in the construction industry, and this has contributed to the increased GDP output of the industry and for the entire economy. Therefore lower interest rates have led to the increased investment and higher GDP although this might cause inflation as interest rates are the costs of borrowed funds, therefore this has resulted to the growth in GDP in the entire economy, the graph below shows the relationship between interest rates and investment.

Therefore according to this graph as the level of interest rates rises then the level of investment goes down, as the level of interest rates go up then the level of investment rises, therefore the interest rates and the investment level arte inversely related, therefore the decline in the interest rates in the entire economy has resulted to the increased investment in the construction industry, and also the growth of industry as the cost of the borrowed funds goes down then investors can access the funds at a lower rate.

Money supply

As the level of money supply in the economy increases then the level of purchases in the economy increases, when this happens then the construction industry will grow as more and more individuals demand the products of the construction industry, this will lead to a growth in the industry and at the same time high employment in the industry, however an increase in the money supply will result to inflation but if this monetary policy is followed by a contractionary monetary policy then the level of inflation will be maintained, therefore the increase in money supply will definitely increase demand for goods and services in the construction industry and also growth in the industry. Therefore there is a need to use both policies ie monetary and fiscal policies that will aid in the reduction of the consequences such as inflation that may lead to a recession in the economy.

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Foreign exchange rates

The exchange rate is the rate at which a domestic currency will exchange with other currencies of other countries, when the exchange is in such a way that the domestic currency is stronger than other currencies then the imports become cheaper and the exports become more expensive, therefore when the domestic currency is strong than other currencies the industry will experience a reduction in the cost of production because the industry imports some of its inputs from other countries. These will result to a reduction in the prices of the products they produce and increase demand; as a result the economy will grow in terms of GDP and standards of living.

References:

The US department of labor (2007) retrieved on 11th September, available at

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http://data.bls.gov/PDQ/servlet/SurveyOutputServlet?&series_id=PCU236221236221&am p;output_view=pct_12mths\

http://data.bls.gov/PDQ/servlet/SurveyOutputServlet?&series_id=LNU04032231

http://data.bls.gov/PDQ/servlet/SurveyOutputServlet?&series_id=CEU2000000001

Brian Snow (1997) Macroeconomics: introduction to macroeconomics, Rout ledge publishers, UK

Stratton (1999) Economics: A New Introduction, McGraw Hill Publishers, UK

Philip Hardwick (2004) Introduction to Modern Economics, Pearson Press, New York

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