12-3-22

This plot is not showing good performance. Volume and jobs should be moving directly in tandem. When inflation is very high, spending climbs rapidly. But most of the climb is just due to inflation. To find out what’s really going on we need to look at business volume. Take out the inflation $.

Business volume = Spending minus Inflation. Inflation adds nothing to business volume. Inflation adds only to the amount of revenue that changes hands.

In 2022, residential spending is up 16%. Sounds great, homebuilder’s revenues are up 16%. It’s great until you note that residential inflation for 2022 is 15%. Real residential business volume for 2022 increased only 1%.

Since Jan.2020 spending is up 20%. Revenues are up 20%. It’s pretty hard to not think you need additional staff to support 20% growth in revenues. But inflation is 30%. Take out the inflation dollars and we find that volume is DOWN 10%. Well, during that time, jobs increased 1 to 2%. And yet, business volume is down 10%. That’s a massive 11%-12% loss in productivity. With labor being about 35% of the total cost of a job, that’s added about 4% to total inflation.

I recently read an article that stated (attributed to Assoc. Bldrs. & Contractors) that the construction industry needs to add 1,000,000 jobs over the next two years. Here’s why that won’t happen:

1) The construction industry has never added more than 440,000 jobs in one year. It’s only gone over 400,000 four times in 50 years, the last time 2005, and never two years in a row. The most construction jobs added in a year since 2011 is 360,000 in 2014. The average growth rate from 2011 thru 2019, and now also in 2022, is 230,000 jobs per year. The most jobs added in any two consecutive years is just over 700,000 in 1998-99 and 2005-06. So, the construction industry may not have the capacity to grow 1,000,000 jobs even in two years.

2) Since the Pandemic, nonresidential construction volume is down 20%, but nonresidential jobs are down only 1.5%. Compared to 2019, nonresidential construction has an 18% business volume deficit. In other words, Nonres construction in 2022 now has 18% more jobs per volume of work put-in-place than it did in 2019. Total ALL construction business volume in that period is down 10% while jobs are up 1.5%.

3) Inflation is playing a key roll here. In 2022, construction spending is increasing $160 billion or 10%. But inflation is 13%. Real total construction business volume in 2022 is down 3%. Jobs are up. For 2023, spending is forecast to gain $80 billion, 4.6%, but after inflation volume will be down 1%. 2023 numbers are driven down by residential.

4) In 2023, nonresidential volume increases $35 to $40 billion. Residential volume drops $50 billion. It takes 4000 to 5000 jobs to put-in-place $1 billion of volume in one year. Nonbuilding and nonresidential buildings growth of $40 billion would need 160,000 to 200,000 new jobs. Some small amount of that will come from the drop in residential. But, go back and read #2 again.

Since Jan 2020, the construction industry as a whole has nearly +175,000 (+2%) more workers to put-in-place -$175 billion (-10%) LESS volume. That’s a huge loss to productivity that may take years to recover, if ever.