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Construction activity contracts for first time in 76 months as new orders fall at survey-record rate.

March saw activity in the UK construction sector contract for the first time in over six years as continued economic uncertainty began to take its toll. New order volumes fell at a survey-record rate and input price inflation reached a forty-month high.

The headline Construction Purchasing Managers’ Index® (PMI)® – a seasonally adjusted index designed to measure the overall performance of the construction economy – registered 47.2 in March, falling below the critical no-change mark of 50.0 for the first time since November 2001. Panel members suggested that market uncertainty had led to delays for a number of projects.

The performance of the three broad sub-sectors covered by the survey varied greatly in March. Residential construction activity fell for the fourth consecutive month and at the sharpest rate in the survey history. Construction activity in the commercial sub-sector also fell at a survey-record pace. In contrast, levels of activity rose robustly in the civil engineering area.

The level of new orders placed with UK construction firms declined for the first time since October 1998 as the seasonally adjusted New Orders Index fell to a reading of 48.9. The rate of contraction was only moderate, but nevertheless the strongest in the survey history. Companies indicated that increasing economic uncertainty had led clients to postpone planned developments.

Although conditions in the construction sector weakened in March, firms continued to recruit additional staff at a rate unchanged from the previous month. The seasonally adjusted Employment Index recorded a reading of 52.4 and there were some reports of the commencement of new projects leading companies to add to their workforces.

UK construction firms reduced their purchases of building materials in March, with the majority indicating that they had done so in line with smaller workloads. Despite lower quantities of purchases, average vendor lead-times continued to lengthen at a marked rate. There were reports of shortages for some raw materials leading to delivery delays.

The seasonally adjusted Input Prices Index rose from 73.2 in February to 74.4 in March – its highest reading since November 2004, to signal a considerable rate of input cost inflation. There were reports of higher prices for a range of inputs, including fuel and metals, contributing to the rise in firms’ average costs.

In March, firms remained optimistic regarding growth of activity over the coming twelve months, although levels of confidence were the lowest since October 1998. The Future Business Activity Index posted a reading of 61.7 as a number of companies anticipated that increased marketing activity and planned company expansions would lead to growth of activity, although others were more cautious, reflecting concerns over the housing market.

Roy Ayliffe, Director of Professional Practice at the Chartered Institute of Purchasing and Supply (CIPS), said:

“As growth in the construction sector contracted for the first time in over six years, it is clear that tougher global market conditions are really starting to make their impact. Purchasing managers reported that further increases in fuel and metal prices placed extra pressure on firms and pushed their average costs even higher.

“The residential and commercial sub-sectors suffered the most as they both contracted at the fastest recorded rates since the survey began. While there is still confidence in the future performance of the sector, this has dropped to the lowest recorded since October 1998 as some companies are particularly concerned about the stability of the UK housing market.”

The April Report on Construction will be published on Friday 2nd May 2008

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