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01 The state of play

The construction industry has yet to show signs that it is under economic pressure. Underlying indicators remain encouraging and activity continued to expand in September. The overall activity index fell by two points to 57, which although lower than in August, was still in the increasing zone. Forward-looking indicators remained positive. The indices for national orders and tender enquiries stood firm at 73 and 61 respectively, while the employment prospects index climbed two points to 56.

A tighter credit regime in the UK will almost certainly be an effect of the sub-prime crisis. Mortgages will become harder to come by, taking the heat out of the housing market further and putting pressure on residential construction. House price inflation has already slowed in many regions and fallen in some. Transactions are on a downward trend and the housing market’s prospects next year are not good. That said, responses from residential firms are yet to reflect this. The residential index stood firm at 54 for the second consecutive month and forward-looking indicators are holding up.

Civil engineering was the star performer in September – the activity index climbed 15 points to 67, its highest level in three months. Orders were stronger than usual, suggesting the buoyancy is set to continue. Its tender enquiries index was down but remained high. The non-residential activity index was unchanged at 58 and its forward-looking indicators remained positive. Employment prospects were subdued in the residential sector but remained fairly strong in the non-residential one.

02 Leading construction activity indicator

(See graphic attached)

03 Work in hand

The majority of residential and non-residential respondents reported having between three and six months work in hand in September. Nearly 40% of residential and just over 20% of non-residential firms reported having less than three months work in hand. A relatively small proportion of residential and non-residential firms reported having more than six months work in hand – just 15% of residential firms and 31% of non-residential ones.

Surprisingly, all responding civil engineering firms had fewer than three months work in hand.

Compared with three months ago, when firms were last asked about work in hand, the situation has only improved for non-residential firms. Then, 30% of responding firms had less than three months and only 15% had more than six months. For residential the situation is broadly unchanged but for civil engineering it has worsened quite considerably.

04 Regional perspective

For many contractors work was plentiful in the summer. Enquiries and orders arrived in a steady stream and employment increased. September, however, brought a significant slowdown across the board. Composite indicators, which incorporate current activity levels, order books and tender enquiries, declined in every region besides Wales.

That said, in most regions, steady gains over the summer meant composite indicators were at such a high level that modest falls gave little cause for concern (a value of about 50 suggests no change, a value higher than 50 suggests an increase and lower than 50, a decrease).Yorkshire and Humberside again went against the rule. The region’s composite indicator has been struggling compared with its neighbours from early 2007. After standing below 50 for several months, it seemed better prospects were on the horizon in August when its indicator climbed to 52. In September, however, this was quashed as the indicator dropped two points to 50.

In the other regions largest declines were recorded where composite indicators were highest. An 11 point decline lowered Northern Ireland’s indicator to 62, taking away the poll position it held for much of 2007.

East Anglia, Scotland, the South-west and the South-east’s indicators also suffered a significant decline of five points or more. More moderate declines of two and four points were seen in the North-east, West Midlands, North-west and the East Midlands.