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Pandemic #13 – Midyear Construction Outlook

See Also this update   Construction Forecast Update 10-16-20

SEE ALSO   Pandemic #14 – Impact on Construction Inflation

Midyear Construction Outlook 8-14-20 based on

  • Actual Spending data includes revisions 2018-2019 issued 7-1-20
  • Actual Jobs data includes BLS Jobs to July (12th) issued 8-7-20
  • Forecast includes US Census June 2020 year-to-date spending 8-3-20
  • Forecast includes Dodge construction starts Midyear Update 8-6-20

The first important thing to note is that the US Census, on 7-1-20, revised all spending data back several years. This is an annual occurrence. This analysis includes all revised data, which adds about $30 billion to 2018, $60 billion to 2019, half of all adding to residential, and revises 2020 data. Not everyone has yet updated to this recently revised data, so you may see differences when comparing forecast reports among several firms. If needed, refer to the percent.

Initial impact on spending from project delays/shutdowns

This compares the current construction spending data to a 2020 Forecast from April 1 before any Pandemic Impacts were recorded. It compares actual to what was expected Pre-Pandemic. The change in year-to-date (ytd) all occurred in 2nd quarter data. In fact, 1st quarter ytd growth was forecast at 7% and it came in at 9.5%. 2nd quarter growth was forecast at 6.8% and it came in at 1%.

Construction Spending 2020 year-to-date (ytd) thru June vs 2019

Actual ytd vs Pre-Pandemic Forecast ytd. Nearly all this change is due to projects delayed/shutdown.

  • Nonres Bldgs down 2.4% ytd in 6mo vs pre-pandemic forecast
  • NonBldg UP 3.0%
  • Residential down 4.9%
  • TOTAL down 1.9%

The measure of decline due to Pandemic delays and shutdowns is not the difference between Q1 and Q2 growth in ytd spending. Nor is the impact measured by the current difference in ytd performance vs 2019. It’s the difference between what was forecast for ytd growth pre-pandemic vs actual ytd growth.

For instance, Residential construction spending thru Q2, as reported in the US Census June construction spending release, is up ytd 7.8%. But pre-pandemic it was forecast to be up 12.7% ytd after 6 months. Hence, residential spending has been impacted by a 12.7% – 7.8% = 4.9% decline from original forecast thru June.

Future impact on spending from lost construction starts

Part one of the decline in construction spending was due to delays/shutdowns. Part two will be the impact of reduced construction starts. That has very little affect right now, but will play out over the next few years. But remember once again, the impact in 2021 is not measured by the difference between 2020 and 2021, its the difference between current forecast for 2020/2021 and the pre-pandemic forecast for 2020/2021.

Year-to-date, total construction starts are down 14%. Residential new starts are down 5%, nonresidential buildings down 22% and non-building infrastructure starts are down 14%.

Dodge updated their forecast to show 2020 construction starts for nonresidential buildings fall on average 20%, less in some markets, but -30% to -40% in a few. Only warehouses is up. Non-building starts fall on average 15%. Only Highway/Bridges is up. Residential starts may fall only 5%-10%.

How those lowered starts affect spending is spread out over cash flow curves for the next few years. This has a major impact on jobs later in 2020 and all of 2021 into 2022. For nonresidential buildings, the greatest impact to spending and jobs affected by a reduction of new starts in 2020 occurs from 2021 into 2022 when many of those lost starts would have been reaching peak spending.

Only about 20% of new starts gets spent in the year they started. 50% gets spent in the next year. The effect of new starts does not show up immediately. If new nonresidential buildings starts in 2020 are down 22%, on average, the affect that has on 2020 is reduced spending by -22% x 20% = – 4.4%. But the affect it has on 2021 is -22% x 50% = -11%.

Construction Spending FORECAST 2020 vs Pre-Pandemic Forecast

This change in forecast incorporates reduced new construction starts for 2020 but also includes the impact from delays and shutdowns.

  • Nonres Bldgs down 5.4% for 2020 vs pre-pandemic forecast
  • NonBldg down 0.3%
  • Residential down 6.5%
  • TOTAL down 4.5% vs pre-pandemic forecast

Construction Spending FORECAST 2021 vs Pre-Pandemic Forecast

Nearly all this change due to a reduction in new construction starts in 2020. Notice, it is nonresidential buildings that are impacted the most, down 10% from the pre-pandemic forecast.

  • Nonres Bld down 9.9% for 2021 vs pre-pandemic forecast
  • NonBldg down 6.4%
  • Residential UP 5.8%
  • TOTAL down 2.5% vs pre-pandemic forecast

Future impact on backlog from delays/cancellations and reduced starts

Starting Backlog is the Estimate-to-Complete (ETC) value of all projects under contract at the beginning of a period. Projects in starting backlog could have started last month or last year or several years ago. Many projects in backlog extend out several years in the schedule to support future spending, so backlog growth in not an indicator that tracks year over year with spending. Current backlog at the start of 2020 would still contribute some spending for the next 6 years until all the projects in backlog are completed.

The last time starting backlog decreased was 2011. Starting backlog will fall 10% in 2021 and 2% in 2022. Except for residential work, about 80% of annual spending comes from starting backlog.

Some of the projects delayed or canceled started before Jan. 2020. When one of those projects is delayed, the portion of the project delayed gets removed from 2020 backlog, but then gets added to future backlog. When one of those projects is canceled, the portion of the project not yet put-in-place gets removed from 2020 and future backlog. Not only does that reduced future backlog but also that retroactively reduces the backlog that was on record at the start of 2020. Therefore, 2020 backlog is reduced by delays and cancellations and future backlog is increased by delays, but reduced by cancellations and a loss of new construction starts.

The following is the difference between what was forecast for backlog pre-pandemic and currently projected backlog based on delays, cancellations and reduced starts.

Backlog projected for the start of 2020:

  • Total Construction down 3.6% vs pre-pandemic forecast
  • Nonresidential buildings down 8.3%
  • Non-building infrastructure up 0.5%
  • Residential backlog down 2.2%, new starts down 5.4%

Although two thirds of Residential spending comes from new starts within the year, 2020 backlog is down 2.2%. 2020 new starts are down 5.4%.

The biggest changes to 2020 backlog are Manufacturing, Commercial/Retail and Amusement/Recreation, all down 10% to 15%.

Backlog projected for the start of 2021:

  • Total Construction down 9.8% vs pre-pandemic forecast
  • Nonresidential buildings down 15.1%
  • Non-building infrastructure down 9.4%
  • Residential backlog up 3.6%, starts up 8.4%

For 2021, Power and Environmental Public Works are down 20% and 10% respectively, but Nonresidential Buildings shows most of the losses. Lodging -40%, Amusement -28%, Manufacturing -26%, and Office and Commercial both down about 15%.

  

Spending Forecast 2020 – 2021

Now that we have highlighted the change in the forecast compared to the pre-pandemic forecast, let’s look at the current spending forecast for 2020 and 2021.

Spend Recession 2020 Summary 8-14-20

See Pandemic #11 – June Construction Spending Update  for coverage of midyear spending year-to-date through June.

Spend Sector monthly 2015-2022 8-11-20

For 2020, the biggest declines are Manufacturing, Lodging and Amusement/Recreation, all down -8% to -10%. Commercial/Retail ends up +3.9% (this market is 60% Warehouse). Office and Educational are down -3% and -1%. Nonresidential buildings takes the brunt of declines in both 2020 and 2021.

In 2021, every nonresidential building market is down from 2020, some markets down 10% to 20%. Educational, Healthcare and Office are all down 3% to 5%. Non-building infrastructure Power market is down -11%, but Highway and Transportation are up +10% to 20%.

Spend YTD 2020 plus Markets 2020 2021 8-14-20

Almost every market has a weaker spending outlook in 2021 than in 2020, because of lower starts in 2020. Starts lead to spending, but on a curve, a good average for nonresidential buildings is 20:50:30 over three years. 20% of the total of all starts in 2020 gets spent in 2020 (yr1) and that represents also about 20% of all spending. 50% of the total value of 2020 starts gets spent in the following year, 2021. So, 50% of spending in 2021 is generated from 2020 starts. If starts are down 20% and 50% of spending comes from those starts, spending will be down 20% x 50% of the work.

Although starts are forecast down 15% to 20% in 2020 and UP 5% to 15% in 2021, the drop in starts in 2020 has the greatest impact on reducing spending in 2021. By June of 2021, spending is down 10% from Feb 2020 and volume is down 14%.

Before we can look at the effect on jobs, we need to adjust spending for inflation. The plot above “Spending by Sector” is current dollars. Here that plot is adjusted for inflation and is presented in constant $. Constant $ show volume. Notice residential remains in a narrow range after adjusting for inflation. No sector shows improvement in volume through Jan. 2023.

Spend Sector Constant2019 monthly 2015-2022 8-16-20

By far the greatest decline in volume is in the nonresidential buildings sector. Volume declines follow in line with spending declines. The greatest losses in 2020 are Amusement/Recreation, Lodging and Manufacturing. In 2021, every major nonresidential building market drops in volume.

Why 400,000 construction jobs are not coming back

Reduced starts in 2020 has a major impact on jobs later in 2020 and all of 2021 into 2022. For nonresidential buildings, the greatest impact to spending and jobs occurs from 2021 into 2022 when many of those lost starts would have been reaching peak spending.

Jobs data show construction added 20,000 more jobs in July. After losing almost 1,100,000 jobs in March and April (out of a prior total 7,600,000), we regained 450,000 jobs in May and 160,000 in June. That leaves construction down 440,000 jobs from the February high point.

Jobs are down 6% from Feb to July, but construction spending is down 7% through June and volume (spending adjusted for inflation) is down 9%.

Although we may get slight jobs growth in the next few months, there is little to no volume growth to support it. Spending is currently down 7% from the Feb high and volume is down 9%. More spending declines are minimal through Q1 2021. Due to the large declines in new construction starts, we will begin to see additional spending and volume declines by spring 2021. Most of the decline will be in nonresidential buildings.

This annual plot back to 1999 shows construction spending vs construction volume. Volume is spending minus inflation.  Notice, volume never recovered to peak 2005. Also notice, recent volume began to decline in 2018.

Spend current vs constant thru 2021 8-11-20

The long-term view of jobs vs volume shows an important point. With few exceptions jobs and volume grow equally. Setting a baseline to zero in 1990, there was a spread in 1992 that was nearly equalized by 1998. Jobs and volume growth remained near equal until 2004. Leading into 2006, spending increased by the most in 30 years. Jobs, which seem to lag slightly, grew 15% from 2004 thru 2006. But inflation posted the highest rate in 30 years. While jobs grew to meet spending growth, almost all the spending growth was inflation. By 2006, jobs growth exceeded construction volume by more than 15%.

Jobs vs Volume 1991-2022 2006 deficit 8-14-20

As I said, with few exceptions, jobs and volume grow equally. If we modify history to reset the baseline to 2006 by increasing volume, the plot now shows that all years from 2006 to 2017 remained consistent in jobs growth vs volume growth. So, with exception of 1992 and 2004-2005, all years from 1990 to 2017 had consistent growth in jobs and volume.

Leading into 2017, spending once again reached a rate of near record growth, second only to 2004-2005. Again, jobs, which seem to lag slightly, grew to meet spending growth. But inflation posted the highest rate since 2006. Once again, jobs grew rapidly, but almost all the spending growth was inflation. By 2019, for the second time, jobs growth exceeded construction volume by almost 15%.

Jobs vs Volume 1991-2022 2006 deficit reset 8-14-20

Jobs are supported by growth in construction volume, spending minus inflation. We will not see construction volume return to Feb 2020 level at any time in the next three years. This time next year, volume will be 5% lower than today, 14% below the Feb 2020 level.

We are currently down 440,000 construction jobs from the Feb high. We may regain 40,000 to 50,000 more jobs before the end of the year. But the declining work volume due to a reduction in new starts in 2020 is indicating by this time next year, not only is there no volume to regain 400,000 lost jobs, but we may lose another 200,000 jobs and be down 600,000 jobs below the Feb 2020 high.

The following plot is the same jobs and volume data as above, only plotted monthly rather than annually. Much of the fear decline of jobs in April has been corrected, but jobs are still down 440,000 from the February high. And yet, the plot shows jobs in excess of construction volume by about 12%.

Jobs vs Volume 2015-Jul 2021 dashed 8-14-20

Volume is set to decline at least for the next two years. There will be no volume growth to support jobs growth and long-term jobs growth already exceeds volume growth by 12%. This is not an environment that supports jobs growth.

Pandemic #12 – Jobs & Starts Updated

8-7-20

Jobs data released today show construction added 20,000 more jobs in July. After losing almost 1,100,000 jobs in March and April (out of a prior total 7,600,000), we regained 450,000 jobs in May and 160,000 in June. That leaves construction down 440,000 jobs from the February high point.

Jobs are down 6% from Feb to July, but construction spending is down 7% through June and volume (spending adjusted for inflation) is down 9%.

Year-to-date, total construction starts are down 14%. Residential new starts are down 5%, nonresidential buildings down 22% and non-building infrastructure starts are down 14%. In April, I estimated jobs losses based on Dodge April forecast that new construction starts in 2020 would fall by 10-15% (see Pandemic Impact #4). Yesterday Dodge updated their forecast to show 2020 construction starts for nonresidential buildings fall on average 20%, less in some markets, but -30% to -40% in a few. Only warehouses is up. Non-building starts fall on average 15%. Only Highway/Bridges is up. Residential starts may fall only 5%-10%.

That lowers my forecast for 2021 and 2022.

How those lowered starts affect spending is spread out over cash flow curves for the next few years. This has a major impact on jobs later in 2020 and all of 2021 into 2022. For nonresidential buildings, the greatest impact to spending and jobs occurs from 2021 into 2022 when many of those lost starts would have been reaching peak spending.

Although we may get slight jobs growth in the next few months, there is little to no volume growth to support it. Spending is currently down 7% from the Feb high and volume is down 9%. More spending declines are minimal through Q1 2021. Due to the large declines in new construction starts, we will begin to see additional spending and volume declines by spring 2021. Most of the decline will be in nonresidential buildings.

Spend Sector monthly 2015-2022 8-11-20

Revisit Pandemic Impact #8 – Construction Outlook to compare this plot above to the forecast as of June 3 and to the original forecast at the start of this year.

Jobs are supported by growth in construction volume, spending minus inflation. We will not see construction volume return to Feb 2020 level at any time in the next three years. This time next year, volume will be 5% lower than today, 14% below the Feb 2020 level. In fact, volume began it’s decline in Q2 2018.

Spend current vs constant thru 2021 8-11-20

Almost every market has a weaker spending outlook in 2021 than in 2020. That’s because only about 20% of spending in the year is from new starts in the year. About 50% of spending from new starts in 2020 is spent in 2021. Although starts are forecast down 15% to 20% in 2020 and UP 5% to 15% in 2021, the drop in starts this year has the greatest impact in reducing spending in 2021.

Only about 20% of new starts gets spent in the year they started. 50% gets spent in the next year. The affect of new starts does not show up immediately. If new nonresidential buildings starts in 2020 are down 22%, on average, the affect that has on 2020 is reduced spending by -22% x 20% = -4.4%. But the affect it has on 2021 is -22% x 50% = -11%.

By June of 2021, spending is down 10% from Feb 2020 and volume is down 14%.

Jobs vs Volume 2015-Jul 2021 8-11-20

We are currently down 440,000 construction jobs from the Feb high. We may regain 40,000 to 50,000 more jobs before the end of the year. But the dropping work volume is indicating by this time next year we may lose another 200,000 jobs and be down 600,000 jobs below the Feb 2020 high. 

 

Pandemic Impact #9 – Spending Revisions & Construction Jobs Reset

updated 7-2-20 to include May spending and June jobs report

6-26-20   April construction spending dropped only 3%, but jobs+hours worked dropped 16%. Even though May showed a partial jobs rebound, jobs during this period are still down much more than spending. If this data is accurate, we dropped about half a million jobs more than then the decline in spending would indicate. If so, it’s time to wake up and accept there has been no labor shortage, but rather there has been a huge excess of nonproductive labor.

We’ve seen in the past that jobs can grow in excess of volume growth, but we’ve never seen a period where jobs show a massive decline without a like decline in spending. If it is true that jobs declined without an equal drop in spending activity, then those jobs were nonproductive.

Is the industry about to reset jobs vs work volume? Or, should we expect revisions to the reported data? With the July 1 release of spending data, all monthly (not seasonally adjusted) spending gets revised back to Jan 2018. We’ll see if Mar-Apr gets revised to show larger spending losses.

This post will be expanded after the July 1 construction spending and jobs releases.

Data on recent Construction Starts for May from June 15 release

Dodge Construction Starts average for Apr+May 2020 compared to Avg Jan-Feb-Mar 2020 — Nonresidential Bldgs -34%, Nonbldg Infra -4%, Residential -27%.

Dodge Construction Starts average for Apr+May 2020 compared to Avg Apr+May 2019 Nonresidential Bldgs -18%, Nonbldg Infra -15%, Residential -3%.

So, while Nonresidential buildings starts were down 34% in Apr+May compared to Q1 2020, that’s down 18% compared to the same months 2019. Residential Apr+May starts are down 27% compared to the avg in Q1 2020, but that’s down only 3% compared to Apr+May 2019.

What impact does that have on the year? if Nonres Bldgs starts are down 34% for 2 months, that reduces starts by 6% (34 x 2/12 = 6) for the year (from the prior trend). If Residential starts are down 27% for 2 months, that reduces starts by 4.5% (27 x 2/12 = 4.5) for the year. The full impact on new construction starts will not be known for many months as owner’s make decisions whether or not to move ahead with new capital investment.

7-1-20  The Census Construction Spending report issued today revises spending back several years. 2015, 2016 and 2017 were all revised up 1% to 1.5%. 2018 was revised up 2% and 2019 up 4.5%.

The 3 month decline in spending for Mar-Apr-May 2020 is now reported at only 6%. There is still some disparity in the spending data (vs jobs) in 2020 that is subject to several more revisions and may not get revised for at least a year.

7-2-20  Jobs report for June covers the period May18-Jun14.  Construction spending released 7-1 covers May. We now have 3 months, Mar-Apr-May of spending and 3 months of jobs for the periods Mar16-Apr12, Apr13-May17 and May18-Jun14.  We now begin to get a picture of jobs losses and shutdowns.

Construction Jobs vs Spending Mar-Apr-May vs Feb

  • The 3-month average decline in Volume was -6%.
  • The 3-month average decline in Jobs+Hours was -11%.

Jobs vs Volume PIP 2001-2020 monthly 7-2-20

Construction Projects that shut down in Mar-Apr-May did not post lost revenues as deep as predicted. Spending was down only -4% from February to April.  In May the decline from February reached -6%. Compared to February, Residential spending for May declined -9.5%, Nonresidential Buildings -5% and Non-building Infrastructure declined only -2%.

The data for Mar-Apr-May 2020 shows that the spending drop from shut down delays was far less than anticipated. More than 90% of all work continued unabated through April and May. The result is fewer reductions thereby increasing spending in 2020 and less delayed work pushed out into 2021, lowering 2021 spending slightly. This shifts the balance of spending and now shows a small spending growth in 2020 and only a slight increase in 2021.

Non-building Infrastructure spending is up 8% year-to-date through May. Nonresidential Buildings is level year-to-date. Residential spending ytd is up 9%.

On April 1, the pre-pandemic forecast for 2020 spending was up 6% over 2019. The revised forecast is now up only 2.9%, based on the spending data for Mar-Apr-May released on 7-1-20. The biggest change contributing to the decrease is in residential work. Non-building Infrastructure work, particularly Power and Highway, continues to support spending the next two years.

Spend Recession 2020 Summary 7-3-20

These markets remained at level spending or posted gains in spending in April and May: Public Safety, Amusement/Recreation, Transportation, Communication, Highway/Street, Public Works. The largest declines in spending were in Residential, Lodging, Healthcare, Power and Manufacturing.

The result of lesser impact from fewer work shut downs in Apr-May is a better overall forecast for 2020 and a reduction of delayed work pushed into 2021. However, the forecast for 2020 may possibly get a bit worse with expected revisions. I was predicting shut downs of 10% to 15% and in some markets 25% and that did not show up in the Census spending report. But the uncertainty of what the fall brings still weighs heavy on any outlook. Still in question is whether some states may yet need to invoke temporary shut downs that were originally expected to occur in Apr-May.

After three months, there are still approximately 400,000 jobs lost without an equivalent decline in spending. Even with some future downward revisions to spending, my thoughts are we could expect many of these jobs lost for good. But this most recent data produced at least some of the correction I expected last month. The plot below of the number of jobs to put-in-place $1 billion of volume spiked downward in April by an unrealistic amount. With the most recent May-June data, spending dropped a bit more and jobs increased. This corrected the downward spike almost back up to where it was.  Spending is still subject to several revisions for a year. Don’t be surprised to see this plot move slightly higher in the near future. A higher value on this plot represents lower productivity. I would expect current conditions to result in lower productivity and eventually that should show up on this plot.

Jobs per 1B Volume PIP 2001-2020 monthly 7-2-20

My forecast updated to 7-2-20 shows spending increasing through the remainder of 2020 with almost all of the change due to restarting work that was shut down. But then as we turn into 2021, spending begins to fall slightly again through mid-year, with the emphasis on change due to loss of spending from a decrease in new starts in 2020. Still unknown, with no way to tell from the data, is how many of the projects that shut down will not restart? Also unknown is the impact of cancellations of starts for new capital investment.

Residential work posted the largest drop in spending so far, down almost 10% in three months. But even with that steep drop, residential spending is still up 9% year-to-date compared to 2019. Residential and Nonresidential Buildings posted large reductions in new starts in April and May. That will have an impact on 2021 spending. Only Non-building infrastructure is forecast to post sizable spending gains in 2020 and 2021.

Starts CF 2015-2022 7-3-20

 

 

 

Pandemic Impact #4 – Construction Jobs Recovery

4-15-20  How will each of the 4 shutdown impacts affect construction?

An estimate of the amount of construction volume lost between March and April could be on the order of 10% to 12%. We won’t see April construction spending #s until June 1st, but a loss of 10% equates to about $10-$12 billion work stopped in a single month.

Associated General Contractors of America reported 40% of construction firms had furloughed or terminated workers by April 10.

  • 30% of firms said they had been asked by government officials to shut down jobs.
  • 53% of respondents said their projects have been delayed by owners.
  • 7% said owners had canceled their projects.

NAHB 4-15-20 Builder Confidence Posts Historic Decline

If they stop buying them, next they stop building them. I’m forecasting temp shut down of 15% of residential backlog and a 10% drop in new starts.

U.S. manufacturing output posts largest drop since 1946

Think of all the manufactured products that go into construction of a new home: Doors, windows, roofing, siding, wallboard, lighting, heating, plumbing fixtures, wire, pipe, cabinets, appliances, etc. How many of these will be in short supply leading to delays in completing new or restarted work?

Pandemic Construction Forecasting needs to account for 4 types of impacts.

  • 1 Work stoppage – stay at home, how deep is the work stoppage
  • 2 Work restart – % restart/month, how slow does work restart
  • 3 Work canceled – some work never restarts, how severe
  • 4 New Starts – future capital spending plans canceled, how cautious

Spend Sector monthly 2018-2021 4-18-20 recession

The initial shutdown cumulative total spending lowest point is in April-May 2020 due to the abrupt shut down. When work rebounds, it restarts gradually over a period of months. Some of the work that shut down will not restart. Also, reduced new starts lowers the cumulative total spending again in the first half of 2021, where residential spending hits it’s low point. Here’s the jobs impact of each.

  • 1 Work stoppage – stay at home, how deep is the work stoppage

From March 15th to April 15th, it is estimated that about 10% to 12% of all construction work stopped, or about $10-$12 billion work stopped in a single month. This work remains on hold as we assess when it is appropriate to reopen the economy. A $10 billion/month work stoppage shuts down 600,000 jobs/month from Mar 15 to Apr 30, perhaps longer.

  • 2 Work restart – % restart/month, how slow does work restart

For a number of reasons, all work will not restart immediately. I’ve modeled the work to restart over 6 months. If only 33% of the stopped work resumes in May, only 33% or 200,000 of the 600,000 lost jobs return, 400,000 remain shut down. If each month 100,000 more jobs restart, the net lost time over 6 months is 1,800,000 man-months or an average of 300,000 jobs for 6 months.

  • 3 Work canceled – some work never restarts, how severe

It’s possible some work will be put on hold for a long time or outright canceled. If 10% of all work that was forced to shut down does not restart, then about 1.5% of all work in backlog disappears. There was $1.3 trillion in starting backlog leading into 2020. A 1.5% decline in backlog amounts to almost $20 billion in work that might not restart. That workload would have taken place over the next 20-30 months, so it is equivalent to about $1 billion a month. Jobs lost would equate to 4000 to 5000 jobs for 20 to 30 months.

  • 4 New Starts – future capital spending plans canceled, how cautious

Dodge is now forecasting a 10% to 15% decline in new construction starts in 2020. (Prior to the pandemic, Dodge was forecasting a 4% drop in new 2020 starts). If new starts drop by 10%, that equates to a decline of about $130 billion in future work. That would be spread out over the next 3 years or so. On average that reduces jobs by about 20,000, but that loss lasts for the next 3 years.

 

Construction spending varies from month to month, but total annual rate of spending will not return to the Jan-Feb 2020 level until at least 2023. Construction jobs may not reach the Feb 2020 level again until 2024.

See also Pandemic Impacts – Part 3 – Jobs Lost, Inflationary Cost

Expect Construction Jobs Growth to Slow in 2020

12-6-19

The construction spending forecast for 2020 indicates 2% growth. But predicted 2020 construction inflation is slightly higher than 4%. So, real construction volume in 2020 decreases by 2%. Jobs should follow volume growth, yet history shows that in non-recessionary periods, even with volume declining, jobs usually continue to increase, but perhaps at a slower rate. 

This plot shows the forecast volume decline in 2020. For the 2020 forecast we already have 80% of all nonresidential spending in backlog. Since new starts account for only 20% of the spending in the year, a 10% drop in new starts from forecast affects only 20% of the spending, so has only a 2% impact on the total. Nonresidential shows flat to moderate gains in 2020.

Residential forecast will be much more dependent on new starts in 2020. About 70% of residential spending within the year comes from new starts within the year, so quick or large changes in new starts has a huge effect on spending for the year. Residential spending is down 10% from early 2018 but residential volume after accounting for inflation is down 15% since that early 2018 peak.

Simply stated, there has not been any volume growth in the last two years to support jobs growth. In constant $, there was no volume growth in any sector in 2018. In 2019 and 2020, only Non-building Infrastructure shows growth, 2%-3%/yr.

This plot shows predicted 2020 jobs growth of 1.5% or just over 100,000 jobs. Since volume is forecast to decline, any jobs growth in 2020 will increase the disparity between jobs and volume growth. The disparity has been increasing since early 2018. It’s a 15% difference right now. Within a year that could be 20%.

Jobs vs Volume 2015-2021 1-4-20

To emphasize the growing difference, look at these two plots, actually, the same plot just modified to account for the 15% bust in 2006.

Jobs vs Volume 1991-2020 2006 deficit 11-19-19

By accounting for the 15% difference in 2006, essentially, resetting the baseline to 2006, it shows all other years up to 2017 were pretty well-balanced growth. With the exception of 2006 and now 2018-2019, for almost every year from 1997 to 2019 jobs grew pretty closely aligned with volume. A big spread occurred in 2006, then growth remained balanced through 2017. The spread now is near the same as it was in 2006.

Jobs vs Volume 1991-2020 2006 deficit reset 11-19-19

 

Construction jobs growth slowed substantially the last two quarters. I  predicted jobs growth would slow because volume growth had already been declining since early 2018 when volume reached a peak of $1,300 billion. Volume is now $1,170 billion, down 10% in 20 months.  After 6 years of jobs increasing at an average 275,000/year, jobs are up only about +150,000 in the last year, but only +48,000 in the last 7 months. The rate of jobs growth is now the slowest in 7 years. I expect this trend to continue.

The plot of jobs growth below shows current growth rate is below an annual rate of 150,000 jobs/year and it is expected to remain there through 2020, potentially dipping as low as 100,000.

Jobs trailing 12mo growth 2013-2020 12-6-19.JPG

I’d be surprised if jobs start to decline, but that certainly could be envisioned and it would help explain away some of the disparity in growth shown on the Jobs/Volume plot up above.

see also Construction Jobs and JOLTS

To Support Construction Jobs, We Need Volume

11-2-19

12-6-19 plots updated to include Nov jobs and Oct spending.

Construction Spending IS NOT Construction Volume.

I read an analyst report this week that stated construction jobs growth isn’t keeping pace with construction volume growth. The reference appeared to be to construction spending. That fails to apply inflation to convert construction spending to construction volume, so compares apples to oranges. Spending must be adjusted for inflation to get real volume growth. Jobs MUST be compared to volume.

For over two years now, construction volume growth has not supported construction jobs growth we’ve seen. I expected jobs growth to slow down. I’ve been saying this for over a year. This sure looks like it.

For 2018 jobs growth averaged over 300k. Since January 2019 the rate of jobs growth has dropped from 300k to 150k.

Jobs trailing 12mo growth 2013-2019 12-6-19

Current projected new starts data IS NOT supporting construction volume growth for the next 2 yrs. Growth of 3%/yr in non-building infrastructure will be offset by declines in residential buildings and flat nonresidential buildings. Therefore, there is no real volume support for jobs growth.

This plot adjusts construction spending by taking out inflation to get real construction volume growth. Last year of real volume growth was 2016. Yet jobs continue to climb. This can’t continue. The plot above shows it has slowed.

Jobs vs Volume 2015-2020 12-6-19

Construction jobs growth has slowed considerably over last 2Q, as expected. While construction jobs are up about +150k in last year, jobs (through Nov) increased only +48k in the last 7 months. I’m expecting this trend to continue. In fact, I wouldn’t be the least bit surprised to see in the near future some months when construction jobs decline. The fact is, construction volume simply does not support jobs growth.

Total construction volume, spending after accounting for inflation, has been down for 5 of the last 6 quarters. Volume peaked from Q1 2017 to Q1 2018, but the last year of real volume growth was 2016. Volume is flat or down while jobs continue to rise. This can only mean contractors will be at risk of being top-heavy jobs if a downturn comes.

Caution is advised if putting emphasis on construction JOLTS, which has been climbing to new highs. From mid-2006 to mid-2007, JOLTS reached near the then all-time high. But construction volume, starting in mid-2006, was already on the downward slope. Volume peaked in early 2006 and fell 10% by mid-2007. Construction did not begin shedding jobs until late 2006, but mid-2007, job losses were well underway. Within 12 months, more than 500,000 jobs were gone. Within 18 months, construction jobs were down 1.5 million.

Construction spending annual rate will increase by 3% in the next 12 months, but volume in constant $ after inflation will remain flat. In Q42020-Q12021 spending slows to less than inflation, so volume begins a modest decline. Growth of 3%/yr in non-building infrastructure will be offset by declines in residential buildings and flat nonresidential buildings. Jobs will continue to grow and spread the imbalance even more.

The construction jobs slow down has been in the cards for a long time. With all the talk of skilled labor shortages, there’s been little discussion of the unsustainable excess jobs growth. Maybe it’s about time to change the conversation.

Construction Jobs and JOLTS

6-16-19

8-15-19 edits – added plots

In early 2007, residential construction volume had already dropped 20% and total construction volume was down 10%, (the annual averages would not show this dramatic drop but a monthly plot would), yet construction job openings and labor turnover survey (JOLTS) was peaking at a 6 year high. From Jan 2007 to Jan 2008, construction had already lost 250,000 jobs. All of that was in residential construction. At the time, nonresidential construction was still growing.

Nonresidential buildings volume would peak in late 2008 and non-building infrastructure peaked in early 2009. By that time, in Q1 2009, residential volume was down 60%. Even though nonresidential construction was peaking, total construction was down 25%.

In 2008 construction jobs declined by another 500,000, about 90% residential jobs. JOLTS dropped to half of the 2007 peak high. It was over the next year or so that all construction began to decline, jobs would drop in all sectors and JOLTS would plummet to an all-time low.

The point is this: The construction recession began with the decline of residential construction in 2006-2007, at a time when JOLTS was at a 6-year high. Jobs declines lagged the decline in real construction volume (the annual average plot shows this well).

Jobs vs Volume 2001- 2010 6-16-19

It is remarkable how residential construction volume from the Q1 2006 peak to Q1 2007 had dropped 20% but residential jobs increased by 6%. JOLTS was peaking at a 6 year high. Although total construction jobs increased in 2006, jobs started to decline in the 2nd half 2006 and would drop 200,000 in 2007. JOLTS continued to show job openings increasing from mid-2006 to mid-2007. Neither jobs growth nor JOLTS reflected what was occurring in real construction volume and certainly did not give any leading indication of what was on the horizon.

The AGC survey of contractors has been reporting difficulty hiring construction labor every year since 2012. Yet from May 2012 through May 2019, construction added 1,870,000 jobs, an increase of 33%, the 2nd strongest jobs growth period ever recorded, not far behind 1993-99 when jobs and volume grew equally (JOLTS was not tracked before 2000). In the four years 2003-2006, just prior to the great recession we added 1 million jobs and volume growth kept up with jobs for the first three years, but then the residential recession started and volume began to plunge. However, JOLTS increased from 2003-2007. These three periods mark the best periods of jobs growth in the last 30 years.

During the last seven years, unlike 1993-99 or 2003-05, when jobs and volume grew equally, construction volume (spending minus inflation) increased by only 22%, far less than the 33% jobs growth. While contractors continue to report difficulty filling jobs, the pace of jobs growth is near an all-time high and is out-pacing the growth in volume of work to support those jobs. JOLTS increased every year during this period.

Now fast forward to 2019. Construction spending growth for the previous two years, 2017 + 2018, increased 4.5% + 5.0%. But inflation during this period was 4.4% + 4.8%. Real construction volume for the last two years increased less than 1%. But jobs increased by nearly 8% and JOLTS more than doubled from 2016 to the end of 2018.

This is a real head-scratcher. Volume has not increased for two years, yet jobs are up 8% and the indicator for job openings is increasing. This is not at all what the data should be showing.

In fact, from the 2006-2007 pre-recession peak until now, non-supervisory jobs have recovered to within 7% of the previous high, but construction volume is still 18% below the previous peak. Total all construction jobs is only 3% lower than the pre-recession high.

Jobs vs Volume 2011- Dec2018 7-9-19 fixed15

Just as the data showed in 2007, the data at the start of 2019 shows that we are top-heavy construction jobs that are not supported by real growth in construction volume.

8-3-19 > added plot > Plot below shows the same data as the above two plots, only plotted monthly, with all data from 2001 thru 2019 on one plot. From 1991 to 2000, jobs vs volume disparity was only 1%. This plot sets Jan 2001 to zero baseline for both jobs and volume. By Dec 2006 the disparity was 20%. This plot shows construction jobs growth vs volume growth now has a wider disparity than Jan 2007 when we were leading into the Great Recession. By far, the largest portion of this growing disparity is residential. In the last 24 months residential volume has decreased by 12% but residential jobs have increased by 7%. To be fair, that doesn’t include some nonresidential jobs that were actually doing residential work.

Jobs vs Volume 2001-Jun2019 8-2-19

Construction volume, (spending inflation adjusted to constant $ volume) hit a 3-year low in Dec-Jan.

8-3-19 > added 12 month trailing jobs plot. Jobs growth rate, although showing some minor up months, has been declining since Q3 2018. As of July 2019, the 12 month trailing total of new construction jobs has dropped almost 50% in 9 months. If we maintain the current rate of jobs growth (avg 15k/mo in 2019), within the next three months we will hit a six-year low. I’m expecting growth to slow, so we may hit that six-year low next month, in the August data.

Jobs trailing 12mo growth 2013-2019 8-2-19
With construction spending in 2019 predicted up only 2%, and forecasting 4.5% construction inflation for 2019, real volume for 2019 will be down 2.5%. Jobs thru April are already up 1.2% year-to-date. So the gap is widening.

We are in the third year of no increase in construction volume. But jobs have continued to grow and JOLTS is at an all-time high. These data sets should not occur at the same time. But this is exactly what occurred prior to the great recession after which we experienced a devastating drop in jobs. However, compared to the construction volume measured by inflation adjusted spending, both the changes in jobs and the JOLTS indicator of job openings seemed to lag real activity by about a year.

Even if we do not experience a construction recession similar to 2008-2011, the current situation may be signaling that we could experience a jobs correction with the slightest downturn. If a jobs correction does not materialize then we are headed for a period in which we will solidify the highest ratio of jobs per volume of work put-in-place as measured in the last 50 years.

Jobs per billion 1970-2018 6-16-19

See also these articles:

Construction Volume vs Jobs 2017-2018

Construction JOLTS – What’s wrong with this picture?

What Jobs Shortage?

A Harder Pill To Swallow!

Residential Construction Jobs Shortages

Construction Volume vs Jobs 2017-2018

5-3-19

For the two years 2017-2018, the  Total All Construction posted Revenue +9.8%,   Volume after adjusting for inflation +0.3%, and total Jobs +7.6%.

Jobs vs Volume 2011- Dec2018 7-9-19 fixed15

Breaking out these numbers by sector,

Nonresidential Buildings —  Revenue +5.9%   Volume -3.1%   Jobs +8.2%

Non-building Civil —  Revenue +3.8%   Volume -3.6%  Jobs +10.0%

Residential Buildings —  Revenue +17.1%  Volume +5.6%  Jobs +8.2%

Similar to a pattern that occurred in the pre-recession spending boom, jobs growth is more closely matched to revenue growth than it is to real volume growth. Overall, for the last two years, construction jobs growth far outpaces construction volume growth.

In the nonresidential sectors, while revenue was positive, after spending is adjusted for inflation, real volume was down 3% to 4%. Yet jobs increased 8% to 10%.  

Residential spending (revenue) was up 17%, but after inflation real volume was up only 5.6%. Residential jobs increased 8%. If we look at residential since 2011 we see persistent growth in volume greater than jobs. But all residential jobs are not captured.

Jobs vs Volume 2011- Dec2018 Residential 5-3-19

When we look at Nonresidential Buildings we see jobs growth far exceeds volume growth. However, there are some jobs related to residential work that are captured in the nonresidential jobs number, any work on high-rise residential buildings performed by contractors whose company is generally classified as nonresidential, particularly structural, and it is impossible to break out those jobs.

Jobs vs Volume 2011- Dec2018 Nonres Bldgs 5-3-19

It is difficult to square the consistent jobs growth in excess of volume growth with the long ongoing narrative of jobs shortages. I suppose it could be argued that it is a “skilled” jobs shortage, a lack of workers with the needed experience. But we would have to look back to the period 2000-2004 to find a time when jobs growth was balanced with volume growth. There are several other articles on this blog documenting the variance back to 2000. 

Here’s a link to a twitter thread on the May release of the April Jobs report showing the differences for the last 12 months.

 

A brief explanation added to answer the question of the difference between Spending (or Revenue) and Volume.

If your company revenues are increasing at a rate of 7% per year at a time when construction inflation is 5%, your business volume is increasing only 2% per year. If you hire support staff to support 7% growth in revenues, you would be grossly over-staffed. Inflation adds nothing to business volume. If you do not factor inflation into your growth projections, you are not forecasting growth properly. Spending is revenue. Volume is spending (revenue) minus inflation.

If a contractor is building houses that last year cost $250,000 to build a 2500sf house, but this year it cost $275,000 to build the same house on the lot next door, the volume did not change. Both sets of dollars represent the cost of the same house, but the most recent house cost 10% more due to inflation. It does not take any more workers to build the house this year than it did last year. Inflation changed the dollars of revenue that changed hands, but inflation added nothing to business volume.

Volume is measuring the amount of work completed, not the cost of the work completed. This blog post compares the number of jobs added to the amount of work added. Adjusting for inflation removes the variable of cost.

Construction JOLTS – What’s wrong with this picture?

7-10-18

In the 24 months from May 2016 to May 2018, Construction Volume went up 3.0%. Jobs went UP by 8%, 500,000 jobs. Spending in that 24 month span increased by just over 12%, but inflation for that period across all construction averaged 9%, hence real volume increased only 3%. That’s a $35 billion increase in volume, enough new work to support 175,000 to 210,000 new construction jobs.

JOLTS (Job Openings and Labor Turnover Survey) job openings went up from 2.4% to 3.0%, up 50,000 openings. Jobs growth exceeded volume growth by more than double and yet job openings went up!

Not only did jobs growth of near 8% far exceed that needed to support the growth in new work, but also, because jobs growth was so strong, it should have reduced job openings.

What’s wrong with this picture?

Jobs vs Volume 2011-JUN2018 7-6-18

Pretty obvious the numbers just don’t add up. First, since construction spending is always later revised up, in recent years by 2%, let’s be generous and assume spending will get revised up by 2%, and let’s keep inflation the same. That would result in a 5% increase in volume or closer to $60 billion in volume. That would support 300,000 to 360,000 new jobs, a need still well below the actual growth in jobs of 500,000.

No matter how we look at it, even generously supposing spending will later increase by 2%, jobs have increased greater than volume of work.

Companies predict job openings based on positions they need to fill within 30 days. But, what if their judgement of positions they need to fill is determined based on what they anticipate from increases in revenue, without taking inflation into consideration. Since revenue also includes inflation, which adds nothing to business volume, that would overestimate the need for new jobs.  We’ve seen this before, in the last expansion.

2003-2006 construction spending increased by 35%, the most rapid increase in spending in over 30 years. But construction inflation during that four year period totaled over 30%, the most for four consecutive years dating back to 1978-1981. After adjusting for inflation real volume in 2003-2006 was up by less than 5%. Considering how high spending was and how much it felt like growth, there was surprisingly little. That did not hold back jobs expansion.

Construction firms added 15% to jobs, or 1,000,000 jobs during this period, more than 3x the actual need.  Job Openings in the JOLTS report increased 100%+, from 100,000 to over 200,000. Firms hired far more than needed and kept increasing the report of job openings, even though they had already hired far more than required. In 2006, housing starts dropped 15%, residential spending dropped 25%, but residential jobs still increased by 6%. From 2003 to 2006, spending on nonresidential buildings increased by 20%, all of it inflation. Volume remained stagnant these four years, however jobs increased by 10%.

Clearly the increases in jobs during this period correlate more with spending than real inflation adjusted volume growth. This four-year period registered the largest productivity decline in over 30 years because the rate of jobs growth was much faster than volume growth.

For 2018-2019-2020, construction spending is currently forecast to increase 6.7%, 3.0% and 4.2%. But after adjusting for inflation, real construction volume is predicted to increase only in 2018 by about 2%. For 2019-2020 volume declines or remains flat.

An argument could be made that JOLTS openings is dependent on firms outlook for growth in the near future. For that, let’s look at predicted volume growth in 2nd half 2018 and in 1st half 2019. It is predicted spending will increase 1.5% in the 2nd half vs 1st half 2018. But adjusted for inflation, volume will decline by 1%. Likewise, for the 1st half 2019, although spending will increase, inflation will outpace spending and real volume will decline 1%. There is nothing in past data or forecast that would support an increase in forecast job openings.

See also What Jobs Shortage? 7-6-18 for related info.

Could it be that some firms are anticipating job needs based on spending, not on volume? Could it be that these firms are not adjusting revenues for inflation to get volume before using the data to prepare a business plan? This is not entirely anecdotal. In several presentations I’ve given over the years I’ve asked the audience, How many of you plan your business needs on your revenue? In a show of hands at a  presentation to NHAGC, a large portion of the audience raised their hand.

If your construction company revenues are up 6% in a year when inflation is 5%, then your net volume is up only 1%. Your company jobs growth required is only 1%.

You cannot ignore the impact of inflation when forecasting jobs need.

What Jobs Shortage?

7-6-18

Jobs report for June issued this morning. Construction Jobs are up slightly.  But the real story is in the last year of growth. Jobs are up 282,000 since June 2017. All across the industry, pundits are screaming jobs shortage. But is there one?

The current spending growth has 2018 on a path to reach an increase of near 8% in spending. But that is not volume. Most of that is INFLATION and that ADDS NO VOLUME. Inflation in 2018 is predicted (already in the spending numbers) to come in about 5% to 6%. Volume is spending minus inflation. Volume in 2018 forecast 2%-3%. Jobs are up 4% since June 2017.

Jobs growth of 4% when net volume is increasing only 2%-3% shows jobs growth in excess of volume. In 2017, jobs increased 3.4% against spending growth of 4.5%. But ALL of the spending growth was inflation, so net volume was 0%. So jobs growth has outpaced volume growth for the last two years by 5%.

See also Construction JOLTS – What’s wrong with this picture? 7-10-18 for related info.

This plot sets the plot lines to zero starting at Jan 1, 2011 so the growth from the bottom of the recession can be visualized. We started Jan 2011 with an excess of jobs.

Jobs vs Volume 2011-JUN2018 7-6-18.JPG

The plot below shows from Jan 2005 through Dec 2010, volume had dropped 15% more than jobs. So we started the recovery in 2011 with excess jobs compared to 2005.

Jobs vs Volume 2001-2010 8-8-17

 

When we look into the three major sectors, the numbers show shortages in residential and job excesses in nonresidential building and nonresidential infrastructure.

You can read much more detail on this in several other articles I’ve written. See this link Construction Jobs 3-8-18  for an article that includes all links to previous articles on the Jobs/Workload imbalance, has an explanation of how some residential jobs are counted in nonresidential and shows the volume/jobs plots for residential and nonresidential.

Residential construction jobs currently total 2,817,000. That’s 83% of the peak jobs year, 2006, which averaged 3,405,000 jobs. Volume of residential work, after adjusting spending for inflation, peaked in Q1 2006 at $780 billion. Volume in the 1st five months of 2018 averaged only $540 billion, only 69% of peak volume. Since the peak in 2006, residential jobs are at 83% of peak, but volume is only at 69% of peak. If we look only at growth since the bottom in Q1 2011, residential jobs have not kept up with volume growth. However, jobs have increase far more than volume compared to the previous peak.

Nonresidential building construction jobs currently total 3,388,000. That’s 99.7% of the peak jobs year, 2007, which averaged 3,397,000 jobs. Volume of nonresidential buildings work, after adjusting spending for inflation, peaked around Q42007-Q12008 at $530 billion. Volume in the 1st five months of 2018 averaged only $420 billion, only 79% of peak volume. Since the peak, non residential buildings jobs have returned to previous levels, but volume is only at 79% of peak. Nonresidential buildings jobs, whether we look at just from the 2011 bottom or we compare since the 2007-2008 peak have increased far more than volume.

The following link shows the jobs vs volume plots for residential and nonresidential.

Much more on this topic Construction Jobs

 

The AGC survey of contractors has been reporting difficulty hiring construction labor every year since 2012. Yet from June 2012 through June 2018 construction has added 1.5 million jobs, the 2nd strongest jobs growth ever recorded. It is 2nd to 1994-1999, the strongest construction expansion on record. We are currently in the 2nd strongest expansion, about equal to 1994-1999, but substantially stronger than 2000-2005.

AGC Aug 2018 survey >Eighty percent of contractors report difficulty finding qualified craft workers in latest AGC workforce survey:

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