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01 The state of play

Official data from the DTI suggests that output in the industry once again surpassed the 拢80bn mark in 2006, with activity up more than 1% from 2005, even after the effects of inflation had been stripped out. This improvement in overall conditions was noticed at firm level and respondents to Experian Business Strategies鈥� monthly survey reported that their activity levels increased throughout 2006 and have so far continued to do so in 2007.

At a national level the activity index climbed three points to 61 in February, its highest level since November last year. Order books were 鈥渁bove average鈥� and the outlook for employment was good. The tender enquiries index did take a minor tumble, but in the grand scheme of things the index remained fairly high and the fall failed to indicate that a significant change in industry conditions could be on the horizon.

Focusing on the sectors, it was the buoyancy of activity in the civil engineering sector that was mainly responsible for the strength of the overall increase, although activity in the residential and non-residential sectors can hardly be described as inert. The civil engineering index reached a high of 71, an increase of nine points from January, the non-residential index fell into second place and the residential index came in at 58. The non-residential and residential indices also increased from January by eight points and six points respectively.

Civil engineering鈥檚 dominance is likely to continue, at least in the short term, if its orders, tender enquiries and employment prospects indices are anything to go by.

02 Leading Construction Activity Indicator

According to the Leading Activity Indicator, Experian Business Strategies鈥� short-term industry forecasting model, the outlook remains bright for construction. The indicator climbed two points to 61 in February and will remain firmly above 50 over the coming quarter. However, the rate of increase is gradually set to slow going forward, as the indicator falls to 57 by May. This optimistic outlook is based on the current strength of order levels and tender enquiries.

The Leading Activity Indicator also uses a base level of 50 鈥� above that level shows an increase, below that level a decrease.

03 Labour costs

For many the labour cost inflation burden has eased compared to when we last posed the question three months ago. Most respondents, about 60% of residential and non-residential and civil engineering firms, reported their labour costs were rising at between 2.6% and 5% a year, compared with 58% and 50% respectively in the previous quarter.

For nearly 15% of residential and non-residential firms, labour costs inflation over the year topped 7.6%. Only 9% of civil engineering firms reported increases of this magnitude 鈥� quite a contrast with last time when nearly 30% of respondents fell into this category.

Only a very small percentage of residential and non-residential firms reported that their annual labour costs actually declined.

04 Regional perspective

For the second month in a row construction activity remained steady or increased in all UK regions in February (as indicated by a level of 50 or above), according to Experian鈥檚 regional composite indicators. These indicators incorporate activity, orders and tender enquiries from the past three months.

There was movement at the top of the leader board as the Eastern region鈥檚 indicator climbed five points to take pole position from the South-west. The North-west continued to prop the bottom end of the table up, as it did for much of 2006. An index value of 50, however, suggests it did manage to stave off a further decline, although it is very unlikely that activity increased at all. The particular weakness of the North-west was emphasised by the fact activity rose in all other regions.

In addition to the east, four regions saw their indicators rise in February 鈥� Yorkshire and Humberside, the East and West Midlands and the South-east. Yorkshire and Humberside enjoyed the greatest change, climbing eight points to 60. The East and West Midlands鈥� indicators stood at 64 and 55 respectively, both one point higher than in January, and the South-east rose two points to 62.

Five regions鈥� indicators declined. The largest falls occurred in Wales and Northern Ireland, both of which were down by six points on January鈥檚 level. The South-west indicator fell by two points and the North-east and North-west both dropped a single point.