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Saturday Morning Thinking Outloud #1 – Infrastructure

10-29-16

Can the construction industry even accommodate adding $1 trillion of new infrastructure spending over 10 years?

It takes about 5000-6000 new jobs to support $1 billion of new construction work for a year. For infrastructure the number is lower. So $100 billion per year continuous for next 10 years would support about 400,000 new jobs for 10 years. Well, that’s not how it will happen, so let’s look a little closer.

  • Historically the fastest rate of growth in spending takes about 3 years to increase 50%. That is for selected markets, never for the entire industry.
  • Infrastructure spending grew 50% in 4 years from 2004 to 2008, when that sector was half the size what it is today.
  • Infrastructure, about 25% of total construction spending, added spending more than $25 billion in a single year only once. The average annual growth for the past 20 years is less than $10 billion/year.
  • Historical growth in jobs rarely exceeds 300,000 new jobs per year. It has never averaged that rate of growth for more than a 3 year stretch. That is for the entire industry.
  • Spending after inflation (real volume growth) for all construction increased an average of $50 billion per year for the last 4 years. The same is expected in 2017.
  • Jobs increased an average of 250,000 per year for the last 4 years.
  • We could expect approximately the same growth in volume and jobs in 2018.

So here’s what we know. The entire construction industry has been growing on average at about $50 billion in volume and 250,000 jobs every year in recent data. Even with the addition of a new influx of infrastructure work, most of that other growth is not going to go away. But how much growth can the entire industry accommodate without bursting at the seams. Let’s make some broad assumptions to see what happens.

Let’s assume for the next 10 years the normal rate of new construction growth gets cut in half. In reality it probably wouldn’t, but we need to push some numbers to extremes to see what happens. So normal new volume, not including any boost from new federal infrastructure spending, might only grow at $25 billion per year and that would absorb 100,000-1250,000 new jobs per year. That accounts for HALF of the entire industry volume growth and jobs growth. How much room does that leave for new growth or expansion in industry growth rates?

If we fill the difference with work from added new infrastructure spending, we can add $25 billion per year in new infrastructure spending and that will add about 100,000 new jobs per year. To account for how the work might be contracted out, let’s just assume in the first year we commit to $250 billion in contracts that are spread over 10 years to get to $25 billion a year in spending. In the 2nd, 3rd and 4th years we could also commit each time to another $250 billion in 10 year contracts that spread the spending out to $25 billion per year for 10 years.

By year 4, we’ve added $100 billion per year in new spending that will stretch out for the next 6 to 10 years ( note: this pushes spending $1 trillion out to 13 years). This spread of money over time, or cash flow, results in increased spending in the government infrastructure markets by 50% in 4 years, matching the best ever industry growth rates. We’ve increased jobs by 100,000 per year for 4 years to a total of 400,000 new jobs and they will all have funds to continue work for the next 6 to 10 years. All that just due to added infrastructure spending.

But let’s not forget the rest of the industry. This would push total spending growth and total industry jobs growth to the highest rates of growth on record. So this is a scenario that is unlikely to be achieved, and it’s not very likely that growth like that could be sustained for very long. It’s also not likely the rest of all the new growth in the industry is going to get cut in half to leave room for new added infrastructure work. So, it’s possible total growth over the next 4 years would be less than anticipated here. This allows for no downturn at any time in the next 10 years.

It begins to seem like it might be pretty difficult to add $1 trillion in spending to the infrastructure construction sector, which is only 1/4 of the entire industry, to be spent in the next 10 years.

When sometimes we push numbers to extremes just to see what happens, we get an unexpected picture of what might, or might not, be possible.


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