For the last three years 2017-2018-2019, construction spending increased 8%, but inflation was 14%. Volume DECREASED 6%. BUT Jobs increased 11%. This ought to leave some people concerned. In this plot of monthly data since 2015, the shaded box shows the period of concern, 2017-2019.
And average job openings was 70,000+ the last two years. The only other time a divergence like this has ever occurred is the years leading into the last recession.
In 2004-2005-2006, spending increased 30%, but inflation was 28%. Volume increased only 2%. BUT Jobs increased 13%. And job openings increased 20,000/yr. After 15 years of near balanced growth, by the end of 2006 jobs growth exceeded volume growth by 15%. In the next 10 years that disparity never corrected.
We can reset the zero baseline to 2006 to see what has happened since 2006.
From 2007 through 2017, jobs and volume were balanced. Since then, the plot below for 2017-2019 looks exactly like 2004-2006 above. So this could raise concern, because,
if we have just experienced a period in which jobs and volume have been nearly in balance (2007-2016), then if the volume of work is no longer increasing, there is no support for adding jobs. Remember, we started this period with 15% excess jobs, but after 10 years, we swallowed that lump.
This plot is the same data as the first plot, only annually vs monthly. This plot of annual data since 2011 shows not much out-of-balance from 2011 to 2017. The shaded box shows the period of concern, 2017-2019.
I had been predicting that jobs growth would slow and it has since Q4 2018. The plot below shows the average jobs growth rate for the preceding 12 months. The rate of jobs growth is now at a seven-year low. It could go lower. It probably should go lower, but nonresidential volume declines in 2020 while residential volume increases slightly, so there is a net growth. Non-building infrastructure work is expected to have strong spending and volume in the next two years due to years of backlog growth.
In almost 30 years of data, only six years are way out of balance, 2017-18-19 and 2004-05-06. Current data sure does not indicate there is a lot of construction work out there in need of additional workers. And if jobs are still growing, it certainly does not indicate there should be an increase in job openings, because volume is decreasing. In fact, by all measures, it should indicate job losses.
1-17-20 Job Openings dropped from a recent average near 350,000 to 214,000 in Nov.
The deficit created in the last three years, a 17% disparity in jobs vs volume growth, is similar to the 15% deficit in 2006, preceded by a long period of jobs and volume growth in balance, then going quickly and hugely out-of-balance. That has major implications for labor cost inflation and productivity which could affect schedules, and that’s not the kind of inflation easily tracked in wages. But it’s real.
2020 Construction Spending Increases, but Volume is Down
Expect Construction Jobs Growth to Slow in 2020
To Support Construction Jobs, We Need Volume
Those graphs clearly show how the industry affected and recovered from the 2008 global crisis, nicely written.
Rob, my forecast for +4.7% spending in 2020 is generated from cash flow of starts, (which still includes spending in 2020 from projects that started 3 yr ago). That’s a much better indicator than the DMI. What happens in 2020 cannot be determined from just a look ahead, but includes all the activity generated by starts looking back 3 years. So, it’s not an assumption. Starts cash flow is indicating spending is up. My analysis of inflation is an avg 3.9%. If spending increases 4.7% and inflation is only 3.9%, the rest is volume growth, 0.7%. My forecast is higher than most, but none of the other forecasters are anticipating spending headed down.
Ed, Why are you assuming construction volume grows in 2020? Seems like Dodge momentum index is suggesting a pullback in 2020. Thanks.
Nick, 14% is the compounded inflation of 2017+18+19 given in the table. 1.0417 x 1.0478 x 1.044
Thanks Ed that makes sense. Do you list or can you direct me to what inflation index you are adjusting to?
I’m using the construction inflation indices developed here and published in this blog. See top posts.
Great article, however how do you get an inflation rate of 14% from 2017?