Construction workers build a new house in Calgary, Alberta, April 7, 2015.Todd Korol/Reuters
The wild ride in Alberta's economy has whip-sawed all sorts of industries, foremost among them the petroleum sector, which has shrunk to a shadow of its former self. Other industries have been affected as well, and there's special concern these days around the non-residential construction industry.
But how bad is it? Has the sky really fallen? Here's where readers of the business pages can learn a valuable lesson in how – and how not to – read economic indicators. The situation is not nearly as bad as the fear mongers would have us believe.
The glass-half-empty observers will point out that non-residential construction activity in Alberta has slumped more than 11 per cent since the beginning of 2015, and that there has been a consistent drop over the past six consecutive quarters. Those statistics are accurate – but they are not put in proper context.
For one thing, they are benchmarking the drop from the strongest quarter ever witnessed in Alberta. The first three months of 2015 saw almost $3-billion in construction spending, nearly a quarter of the total in Canada. Using the record level as the yardstick to assess how bad things have become makes for a dramatic story, but it's not a story that gives the reader an accurate picture of the current situation.
Secondly, construction prices have fallen during Alberta's recession (although some construction companies will no doubt beg to differ on that, especially on construction materials). The official price index of non-residential building construction fell by 6.6 per cent over the past six quarters. The graph above shows the more muted drop in construction spending in constant dollars (i.e., accounting for falling costs) versus current dollars. When prices are fluctuating, the constant dollar measure always gives a clearer picture of what's going on.
Third, non-residential construction spending always follows a fairly predictable ebb and flow, even adjusting for inflation. Over the past 10 years, there have been four major pullbacks in construction activity in which spending fell significantly. In fact, in 2012 (not a recession year for Alberta) spending shrank more than 12 per cent in one year.
What the "sky-is-falling" fear mongers fail to mention is that in the third quarter of this year, non-residential construction spending was actually above the 10-year average in inflation-adjusted terms. Not much doom and gloom in that statistic.
Yet even if you're convinced that Alberta's construction sector remains in reasonably good shape (all things considered), you'd be correct in asking the obvious question: What's going to happen next year? With a plethora of major office buildings in Calgary and Edmonton nearing completion, won't the glut of commercial office space slam the brakes on new construction? Maybe the real nosedive in spending is just around the corner.
For peering into the future, the best tools we have are the statistics on building permits. These give an excellent measure of the intentions of building developers.
Comparing permits issued in the past 12 months with those issued in the previous 12 months, we do see a drop in non-residential construction intentions, but of a mere 3.6 per cent. It is true that commercial construction spending – all of those shiny office towers and big-box retail outlets – is expected to pull back more significantly. That's understandable. With an office vacancy rate already at 25 per cent, Calgary won't be seeing any more new high-rise offices go up for quite a while.
Offsetting the drop in commercial activity, however, is an expected rise in government and institutional construction projects. Building permits in the province are up 12 per cent, suggesting a nice boost in spending as the commercial projects start to cool.
Economic indicators can be very helpful tools in gauging the current health of the economy, but only if they are read and used correctly. Three lessons are offered here: don't compare only to the record high (or low); use dollar values that adjust for inflation; and look at long-term trends and averages.
Doing all of that, Alberta's non-residential construction sector is hardly in a tailspin. Yes, some understandable moderation is in store for 2017, but nothing that the province hasn't seen dozens of times before.
Todd Hirsch is the Calgary-based chief economist of ATB Financial, and author of The Boiling Frog Dilemma: Saving Canada from Economic Decline.