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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 jobs added in any two consecutive years is just over 700,000 in 1998-99 and 2005-06. The most 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. 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.
Construction is Booming. Well, OK, construction is setting up to be booming in 2023-2024. New construction starts for Sept are down 19% from August and yet starts are still near the highest levels ever. Sept is 4th highest total starts ever, all four of the highest ever months of new starts are in 2022. July and Aug were the two highest months of new starts ever. Total growth in starts over 2021-2022 > Nonres Bldgs +50%, Nonbldg Infra +40%, Residential (all in ’21) +22%.
Construction Spending will not be participating in a 2023 recession. Except, residential might. Residential starts in 2021 were up +21% to a really high new high. But starts are forecast flat in 2022 and 2023. Spending grew 44% in the last 2yrs, but inflation was 30% of that 44%. With zero growth in starts forecast for 22-23, spending struggles to keep up with inflation. Residential will post only an increase of 3% in 2023 spending, but midyear there is potential for 6 consecutive down months.
SPENDING BY SECTOR CURRENT $ AND INFLATION ADJUSTED CONSTANT $
Nonresidential Buildings new starts last 2yrs (2021-2022) are up 50%. Spending next 2yrs (23-24) is forecast up 21%.
Nonbldg starts 2022-23 are forecast up 38%. Spending 2023-24 forecast up 20%.
In 2023, it’s Nonresidential Buildings leading growth. In 2024, it will be Nonbuilding Infrastructure leading spending growth. Both are expected to grow more than the inflation index, so there will be real volume growth to report.
Residential construction (Dodge) starts since Jan 2021 have posted 17 out of 21 months of the highest residential starts ever posted. The 5 highest months ever are all in 2022.
Nonresidential Bldgs starts in Sept dropped 23% from August and yet still that was the 3rd highest month ever. July and August were 2nd and 1st.
Construction starts for Nonresidential Bldgs posted each of the last 4 (consecutive) months thru October higher than any months ever before. The avg of last 4 (consecutive) months is 33% higher than the avg of the best previous 4 mo ever (even non-consecutive). Growth in Manufacturing construction starts for 2022 far surpasses growth in any other market, up over 150% year-to-date.
Construction Spending Sept total up 0.2% from Aug. Aug & Jul were revised up 1.1% & 1.3%. Total spending YTD thru Sept’22 is up 11.4% from Sept’21. MAJOR movers; Mnfg up 16% since Jun. Jul & Aug were revised up 7.4% & 8.4%. Highway is up 9% since June. Jul & Aug were revised up by 4.0% & 4.4%.
Total construction spending for 2022 is on track to increase +11.1%. Residential +16.8%, Nonres Bldgs +9.5%, Nonbldg +0.5%.
Comm/Rtl +18% Mnfg +32% Power -8% Pub Utilities +14%.
Current and predicted Inflation SEE Construction Inflation at Year-End 2022
Inflation adjusted volume is spending minus inflation.
Total volume for 2022 falls 1%. Rsdn +3%, Nonres Bldgs -1%, Nonbldg -9%.
Total volume for 2023 is up 1%. Rsdn -3%, Nonres Bldgs +8%, Nonbldg +2%.
SPENDING TOTAL ALL $ CURRENT $ AND INFLATION ADJUSTED CONSTANT $
Overall Construction Spending is up 15% since the onset of the pandemic, but, after adjusting for 25% inflation, volume is down 10%. Residential jobs are near even on track with volume, but Nonres and Nonbldg have volume deficits of approx 20-25% vs jobs.
- Feb 2020 to Aug 2022
- Resdn spend +42%, vol +6.5%, jobs +7%
- Nonres Bldgs spend -8%, vol -24%, jobs -3%
- NonBldg spend -7.5%, vol -24%, jobs +1%
JOBS VS CONSTRUCTION VOLUME VS SPENDING (VOL = SPENDING MINUS INFLATION
Labor Shortage? Jobs should track volume, not spending growth. Vol = spending minus inflation. Volume is down while jobs are up. If the same production levels ($ put-in-place per worker) as 2019 were to be regained, theoretically, nonresidential volume would need to increase 20% with no increase in nonresidential jobs. I don’t expect that to occur, therefore, productivity will remain well below that of 2019.
Over the next year or two, there could be several billion$ of construction spending to repair hurricane damaged homes in Florida. That spending will NOT be reported in Census spending reports. Renovations to repair natural disaster damage are not recorded in construction spending. Construction spending to replace homes entirely lost to damage IS reported in Census spending, but is reported as renovations/repair, not new SF or MF construction.
RESIDENTIAL SPENDING SF-MF-RENO CURRENT $ AND CONSTANT $
Construction jobs through August 2022 increased to 1.1% above the pre-pandemic high in Q1’20. Factoring in hours worked, we find that is reduced slightly to show jobs x hours worked for August 2022 is 0.4% lower than the peak in Q1 2020. Most anyone would say jobs have returned to the pre-pandemic high.
Construction spending through July is 14.3% higher than the pre-pandemic high in Q1’20. BUT INFLATION through July is 23% higher than pre-pandemic Q1’20. Therefore real construction volume (spending minus inflation) is currently 7% BELOW the pre-pandemic high in Q1 2020.
Jobs are up, but volume is down.
So, when you read that jobs are back to pre-pandemic levels, maybe that’s not as great as you might think. Sure more people are back to work, but has the volume of work needed to support those jobs increased sufficiently?
Inflation hides a lot of reality. We now produce 7% less volume of work put-in-place with 1.1% more workers putting in 0.4% less hours than before. That’s a huge construction productivity loss, down 6.6% in the last 30 months. Where does that productivity loss show up in the data?
Here’s the plot of actual and forecast CONSTRUCTION SPENDING. Compare this to the next plot.
Here’s the plot of actual and forecast CONSTRUCTION SPENDING ADJUSTED FOR INLATION.
Notice, Residential volume is up 11% since Q1 2020, but nonresidential buildings volume is still down 23% and non-building volume is down 18%.
Let’s say construction labor is 35% of total construction cost. If wages go up by 5%, then total cost goes up by 5%x35% = 1.75%. Well, if productivity declines by 6.6%, labor cost goes UP by 6.6%x35% = 2.3%.
That’s the inflation cost. Here’s a look Behind the Headlines. These two plots show the number of jobs required to put-in-place $1 billion of volume (inflation adjusted spending) or the inverse, the amount of volume put-in-place by one job in one year.
It’s great that jobs are coming back, but don’t overlook the cost that has added to inflation. Don’t expect to see a lot of improvement over the next 12 months. In fact, if jobs continue to grow at the current rate (or any rate for that matter), this time next year the imbalance is worse.
These data reflect Sept’21 construction spending Put-in-Place, Jobs and hours worked thru Oct’21, Dodge Nov’21 New Starts Outlook 2022, Inflation factors thru Q3’21
This post, originally written in Jan 2021, and updated several times, is viewed over 1,000 times a week.
>>> 2-11-22 SEE Construction Inflation 2022
See Feb 2022 note below and updated table at bottom of file.
10-15-21 update – Link to PPI data from Jul to Sep. Table PPI Inputs Sep21. Updated BCI plot.
As of Sept 2021, PPI for materials inputs to construction is up ytd 15% to 18%. For the 18 months since March 2020, the onset of Pandemic, the PPI for materials inputs to construction is up ytd 23%, but the PPI Buildings Cost Index for final cost to owner is up only 5% to 6%. (Part of this can be attributed to periodic PPI forecast updates).
As of 10-15-21, nonres bldgs inflation for 2021 is estimated at 4.6% and residential at 12.9%. Those increases are reflected in the tables and plots below. Both have been trending up.
11-10-21 From Sept to Oct materials price changes were normal, but Final Demand prices jumped what could be considered an entire year’s worth of increase in just one month. We’ve been watching the price pass thru increase slowly, until now. This is the single largest monthly increase in Final Demand pricing since the indices were started in 2006.
As of 11-10-21, nonres bldgs inflation for 2021 is estimated at 6.8% and residential at 15%. The 2022 forecast is estimated at 4.5% for nonres bldgs inflation and 7% for residential.
As of Jan 2022, not all nonresidential sources have updated their Q4 inflation index. A few are still reporting only 4% inflation for 2021, but several have moved up dramatically, now reflecting between +10% to +14%. My estimate for 2021 inflation has been changing, moving up again. Nonres bldgs inflation for 2021 is currently estimated at 8.7% and residential at 15%. Graphs in this post are not yet updated. The 2015-2023 table of indices has been updated 1-20-22.
2-10-22 Here’s a list of 2021 indices average annual change and date updated.
- +8.4% Construction Analytics Nonres Bldgs Dec
- +14.1% PPI Average Final Demand 5 Nonres Bldgs Dec 2021
- +11.4% PPI average Final Demand 4 Nonres Trades Dec
- +1.9% Turner Index Nonres Bldgs annual avg 2021 Q4 2021
- +4.84% Rider Levett Bucknall Nonres Bldgs annual avg 2021 Q4
- +12.6% Mortenson Nonres Bldgs annual avg thru Q3 2021
- +11.7% U S Census New SF Home annual avg 2021 Dec
- +7.4% I H S Power Plants and Pipelines Index annual avg 2021 Dec
- +7.1% BurRec Roads and Bridges annual avg 2021 Q4
- +6.0% FHWA Fed Hiway annual avg 2021 Q4
- +9.11% R S Means Nonres Bldgs Inputs annual avg 2021 Q4 2021
- +10.0% ENR Nonres Bldgs Inputs annual avg 2021 Dec
- +7.2% Ready Mix Concrete Inputs Dec
- +16.4% Lumber/Plywood Inputs Dec
- +46% Fabricated Steel Inputs Dec
- +39% Sheet Metal Inputs Dec
- +21% Gypsum Products Inputs Dec
- +9.6% Flat Glass Inputs Dec
- +23% Copper Products Inputs Dec
- +55% Aluminum Products Inputs Dec
The 2022 forecast is estimated at 4.5% for nonres bldgs inflation and 7% for residential.
Construction Jobs Outlook 10-11-21 read the section on impact of inflation
Inflation – PPI data June-Sept 2021 some materials up 20%-40% but final cost up only 5%-6%
8-15-21 update – These links at top here point to most recent inflation data, to supplement this post. The latest construction spending forecast reflects inflation of 4-6% for nonresidential and 12-13% for residential. The latest tables and BCI plot, as of 8-15-21, are at the very bottom in this file. All 2021 indices have increased since my May 2021 Inflation Report. These tables have the latest.
1-25-21 What impacts should we expect on Construction Inflation in 2021?
In April 2020, and again in June 2020, I recommended adding a minimum 1% to normal long-term construction inflation (nonres longterm inflation = 3.75%), to use 4% to 5% for 2020 nonresidential buildings construction inflation. Some analysts were suggesting we would experience deflation. Deflation is not likely. Only twice in 50 years have we experienced construction cost deflation, 2009 and 2010. That was at a time when business volume was down 33% and jobs were down 30%. In 2020, volume dropped 8% from Feb to May and we’ve gained half that back by Dec. Jobs dropped 14%, 1,000,000+ jobs, in two months! Now volume is still down 4% and jobs are down 2% from Feb peak. We’ve gained back 850,000 jobs. But also, we’ve gained back more jobs then volume. That adds to inflation.
Volume drops another 5% in 2021, all nonresidential, and then another 3% in 2022. Jobs could drop overall 8%-10% for all of 2021-2022, 500,000 to 700,000 jobs.
Even though material input costs are up for 2020, nonresidential inflation in 2020 remained low, probably influenced by a reduction in margins due to the decline in new construction starts (-24%), which is a decline in new work to bid on.
Volume = spending minus inflation.
Residential business volume dropped 12% from the January 2020 peak to the May bottom, but has since recovered 22% and now stands at a post Great Recession high, 10% above one year ago. Although residential spending remains near this high level for the next year, volume after inflation begins to drop by midyear. For the year 2020, Residential Building Materials Inputs are up 6.2%. See PPI charts. Sharply higher lumber prices have added more than $17,000 to the price of an average new single-family home since mid-April ($24,000 as of 3-30-21). Residential inflation averaged 5.1% for 2020. (UPDATE 3-30-21 – Single Family home prices increased 11% since March 2020. Lumber cost is now 3x what it was in March 2020. These will both impact cost to build SFH).
10-15-21 – The U.S. Census Single-Family house Construction Index increased 6.7% from Feb 2020 to Feb 2021. Since February 2021 through August it is up another 8.5% for the last 6 months. https://www.census.gov/construction/nrs/pdf/price_uc.pdf
Nonresidential volume has been slowly declining and is now down 8.5% from one year ago. I had forecast by 3rd quarter 2021, nonresidential buildings volume would be down 15% lower than December 2020, or 25% below the Feb 2020 peak. It’s down 5.5% from Dec’20 and down 23% from the Feb’20 peak. This tracks right in line with the 24% decline in new construction starts in 2020. Most of the spending from those lost starts would have taken place in 2021, now showing up as a major decline in spending and work volume. Nonresidential inflation for 2020 dropped to 2.5%, the first time in 7 years below 4%. It’s expected to increase in 2021.
The Producer Price Index tables published by AGC for year-end 2020 https://www.agc.org/sites/default/files/PPI%20Tables%20202012.pdf shows input costs to nonresidential buildings up about 3.5% to 4.5% for 2020, but final costs of contractors and buildings up only 1% to 2%. This could be an indication that, although input costs are up, final costs are depressed due to lower margins, a result of fewer projects to bid on creating a tighter new work available environment which generally leads to a more competitive bidding environment. This could reverse in 2021 as the volume of work to bid on in most markets begins to increase.
As of Sept 2021, PPI for materials inputs to construction is up ytd 15% to 18%. For the 18 months since March 2020, the onset of Pandemic, the PPI for materials inputs to construction is up ytd 23%, but the PPI Buildings Cost Index for final cost to owner is up only 5% to 6%. Construction inflation is very different right now for subcontractors vs general contractor/CM.
11-10-21 From Sept to Oct materials price changes were normal, but Final Demand prices jumped in just one month what could be considered an entire year’s worth of increase. We’ve been watching the price pass thru increase slowly, until now. This is the single largest monthly increase in Final Demand pricing that I can remember. In part, the disparity between these two indices is a data collection issue in how Census gets this information. The Oct increase in the Final Demand index represents several months of growth, all reported at once. Final demand indices are just catching up.
This October 2021 increase is not yet reflected in any other building cost inflation index.
The Turner Construction 2020 Cost Index for nonresidential buildings averaged 1.8% higher than the avg for all of 2019. The Turner index appears to show the lowest gains in forecasts for 2021, up only 1.4% ytd though Q2. http://turnerconstruction.com/cost-index
The Rider Levitt Bucknall nonresidential buildings average index for 2020 increased 3.5%. Q3 2021 compared to Q3 2020 is up 5.5%. https://www.rlb.com/americas/
R.S.Means quarterly cost index of some materials for the 4th quarter 2020 compared to Q1: Ready-Mix Concrete -1.8%, Brick +10%, Steel Items -1% to -5%, Framing Lumber +32%, Plywood +8%, Roof Membrane +5%, Insulating Glass +12%, Drywall +3%, Metal Studs +23%, Plumbing Pipe and Fixtures +1%, Sheet Metal +20%. https://www.rsmeans.com/landing-pages/2020-rsmeans-cost-index
U.S. manufacturing output posts largest drop since 1946. Think of all the manufactured products that go into construction of a new building: Cement, steel, doors, frames, windows, roofing, siding, wallboard, lighting, heating systems, wire, plumbing fixtures, pipe, valves, cabinets, appliances, etc. We have yet to see if any of these will be in short supply leading to delays in completing new or restarted work.
There have been reports that scrap steel shortages may result in a steel cost increase. Scrap steel prices are up 27% in the last quarter and up 40% for the year 2020. Scrap is the #1 ingredient for new structural steel. The U.S. steel industry experienced the most severe downturn since 2008, as steelmakers cut back production to match a sharp collapse in demand and shed workers. Capacity Utilization dropped from 82% in January 2020 to 56% in April. In mid-August, CapU was up to 61%, still very low. As of January 23, 2021 CapU is up to 76%, well above April’s 56% but still below desired level. Steel manufacturing output is still down compared to pre-covid levels. Until production ramps back up to previous levels there may be shortages or longer lead times for delivery of steel products. In August 2021, CapU is back to 85%.
Steel Prices at mill in the U.S. are up 60% to 100% in the last 6 months. All prices are 50% to 75% higher than Feb 2020. http://steelbenchmarker.com/files/history.pdf . This is mill price of steel which is about 25% of the price of steel installed. What affect might a steel cost increase have on a building project? It will affect the cost of structural shapes, steel joists, reinforcing steel, metal deck, stairs and rails, metal panels, metal ceilings, wall studs, door frames, canopies, steel duct, steel pipe and conduit, pumps, cabinets and furniture, and I’m sure more. Assuming a typical structural steel building with some metal panel exterior, steel pan stairs, metal deck floors, steel doors and frames and steel studs in walls, then all steel material installed represents about 14% to 16% of total building cost. Structural Steel only, installed, is about 9% to 10% of total building cost, but applies to only 60% market share being steel buildings. The other 6% of total steel cost applies to all buildings. https://www.thefabricator.com/thefabricator/blog/metalsmaterials/steel-prices-reach-levels-not-seen-since-2008 At these prices, if fully passed down to the owner, this adds about 1.5%-2% to building cost inflation. With demand in decline for nonresidential buildings, I would expect to see all these steel price increases recede. Also, take note, as of January 2021, none of this steel price movement appears captured in the PPI data or RSMeans data.
Contractors have been saying they have difficulty acquiring the skilled labor they need. This has led to increased labor cost to secure needed skills. I expect the decline in nonresidential work volume in 2021 to result in as much as a decline of 250,000 nonresidential jobs in 2021. This results in labor available to fill other positions.
This SMACNA report quantifies that labor productivity has decreased 18% to meet COVID-19 protocols. https://www.constructiondive.com/news/study-finds-covid-19-protocols-led-to-a-7-loss-on-construction-projects/583143/ Labor is about 35% of project cost. Therefore, just this productivity loss would equate to -18% x 35% = 6.3% inflation. Even if, for all trades, the average lost time due to COVID-19 protocols is only half that, the added inflationary cost to projects is 3% above normal. But that may not remain constant over the entire duration of the project, so the net effect on project cost would be less.
Post Great Recession, 2011-2020, average nonresidential buildings inflation is 3.7%. In 2020 it dropped to 2.5%, but for the six years 2014-2019 it averaged 4.4%. Residential cost inflation for 2020 reached 5.1%. It has averaged over 5% for the last 8 years. The 30-year average inflation rate for nonresidential buildings is 3.75% and for residential it’s over 4%.
This survey of members by AGC https://www.agc.org/sites/default/files/2021_Outlook_National_1221_.pdf just published provides some insight into construction firms outlook for 2021.
Almost every construction market has a weaker spending outlook in 2021 than in 2020, because approximately 50% of spending in 2021 is generated from 2020 starts, and 2020 nonresidential starts are down 10% to 25%, several markets down 40%. Nonbuilding starts are down 15%, but will increase 10% in 2021.
Typically, when work volume decreases, the bidding environment gets more competitive. We can always expect some margin decline when there are fewer nonresidential projects to bid on, which typically results in sharper pencils. However, if materials shortages develop or productivity declines, that could cause inflation to increase. We can also expect cost increases due to material prices, labor cost, lost productivity, project time extensions or potential overtime to meet a fixed end-date.
Constant $ plot updated 10-14-21
Constant $ = Spending minus inflation = Volume
Many projects under construction had been halted for some period of time and many experienced at least short-term disruption. The delays may add either several weeks to perhaps a month or two to the overall schedule, in which case, not only does labor cost go up but also management cost goes up, or it could add overtime costs to meet a fixed end-date. Some of these project costs have yet to occur as most would be expected to add onto the end of the project.
Some projects that were put on hold (nonresidential buildings starts in 2020 dropped 24%) just prior to bidding in 2020 may now re-enter the bidding environment. The rate at which these projects come back on-line could impact the bidding environment. If several months worth of projects that delayed bidding last year all come onto the market at once, or at least all in a more compressed time span than they would have, the market could be flooded with work and bidding contractors now have more choice, can bid more projects than normal and could potentially raise margins in some bids. This would have an inflationary effect. Also, there can be difficulty in starting many projects at the same time, rather than more staggered starts. It burdens subcontractors and suppliers with too much of the same type of work all going on at the same time. This could exacerbate labor issues and could lead to project time extensions.
The hidden inflationary costs of bidding environment, project time extensions, potential overtime and lost productivity haven’t all yet appeared in the data. Some of these could still add to 2020 inflation. Also, the huge loss of new starts in 2020, which meant fewer projects to bid on in 2020, probably reduced margins in 2020. Nonresidential starts are projected to increase 4% in 2021, so that could lead to some recovery of margins, however, even with 4% growth in new starts, that comes after a 24% drop in 2020, so remains still 20% below 2019. Total volume of work is declining and new projects available out to bid is still depressed, so pressure on margins still exists.
update 4-15-21 Although materials cost inflation will be higher, I expect non-residential buildings inflation final cost in 2021 to range between 3.5% to 4.0%, with potential to be held lower. Subcontractor costs, such as for steel or lumber, could range much higher due to huge material cost increases. All the downward pressure on nonresidential inflation is on margins. There is currently 20% less nonres bldgs work to bid on than in Q1 2020.
updated 3-30-21 Expect 2021 residential inflation of 6% to 8% with potential to push slightly higher.
See Construction Inflation Index Tables for indices related to Nonbuilding Infrastructure work and for more links to sources.
(10-15-21 The tables and plot below include updated residential costs and updated nonresidential inputs).
The tables below, from 2011 to 2020 and from 2015 thru 2023, updates 2020 data and includes Q3 PPI data thru Sept and provides 2021-2023 forecast. The three sectors, highlighted, are plotted above.
NOTE, these tables are based on 2019=100.
The following table shows 2021 updated as of 10-15-21 reflecting 4.6% inflation for nonresidential buildings and 13% for residential.
As of 10-14-21, nonres bldgs inflation is estimated at 4.6% and residential at 12.9%. Those increases since August are reflected in these tables.
11-10-21 From Sept to Oct materials price changes were normal, but Final Demand prices jumped what could be considered an entire year’s worth of increase in just one month. We’ve been watching the price pass thru increase slowly, until now. This is the single largest monthly increase in Final Demand pricing that I can remember. Prior to this I expected future cost increases to add on slowly. This changes the entire outlook.
11-10-21 Construction Analytics and PPI Data have been updated for 2021, 2022 and 2023. Other firms forecasts will be updated when they post, so there may be differences. For example CA 2021 index for nonres bldgs now reflects a +6.5% annual increase. Turner Q3 2021 is still indicating just +3%.
11-10-21 Nonres bldgs inflation for 2021 is estimated at 6.8% and residential at 15%. The 2022 forecast is estimated at 4.5% for nonres bldgs inflation and 7% for residential. Increases to CA and PPI since Sept are reflected in this table.
As of Jan 2022, not all nonresidential sources have updated their Q4 inflation index. A few are still reporting only 4% inflation for 2021, but several have moved up dramatically, now reflecting between +10% to +14%. My estimate for 2021 inflation has been changing, moving up again. Nonres bldgs inflation for 2021 is currently estimated at 8.7% and residential at 15%. Graphs in this post are not yet updated. The 2022 forecast is estimated at 4.5% for nonres bldgs inflation and 7% for residential.
The 2015-2023 table of indices has been updated 2-10-22. However, there is still some potential for 2021 data to move higher.
How to use an index: Indexes are used to adjust costs over time for the affects of inflation. To move cost from some point in time to some other point in time, divide Index for year you want to move to by Index for year you want to move cost from. Example : What is cost inflation for a building with a midpoint in 2021, for a similar nonresidential building whose midpoint of construction was 2016? Divide Index for 2021 by index for 2016 = 108.2/87.0 = 1.24. Cost of building with midpoint in 2016 x 1.24 = cost of same building with midpoint in 2021. Costs should be moved from/to midpoint of construction. Indices posted here are at middle of year and can be interpolated between to get any other point in time.
All forward forecast values, whenever not available, are estimated by Construction Analytics.
Also See Construction Inflation Index Tables the post for links to dozens of other indices
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.
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.
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.
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?
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.
Construction Overtime – A Common Miscalculation
You never get full production out of all overtime hours worked. A common miscalculation when applying overtime overlooks productivity losses.
Let’s say we have a project that has 100 manweeks of productive work (100mw x 40hrs = 4000 manhours) remaining on the schedule to completion, but that we absolutely must finish the job is less time. Also, let’s say we modify the work week from 5 days 8 hours = 40 hours/wk to Overtime (OT) 6 days 10 hours = 60 hours/wk. A simple calculation indicates that if we add 50% more hours per week (60hrs vs 40hrs), we could finish the job in 1/3 less time.
- Original plan = 4000 manhours / 40 hrs/week/man = 100 manweeks
- Revised plan = 4000 manhours / 60 hrs/week/man = 67 OT manweeks
- Time saved = (100–67)/100 =33/100= 33% time saved, 33 mwks saved
- Cost added would be +20%. See example of cost calculation below.
But, unfortunately, that would not be correct. That would have to assume no OT productivity losses. You won’t get 60 productive hours out of a man in a 6-10s 60-hour OT workweek. You will get only 50 productive hours.
Productivity loss graphic from Applied Cost Engineering, Clark and Lorenzoni, Marcel Dekker, Inc., 1985.
Yes, you still pay for all hours and the man is still on the job for 60 hours, but work progress slows as workers are kept on the job for longer periods. So how much time would be saved on the schedule?
Revised plan productivity 4000 manhours work / 50 productive hrs per week per man = 80 OT manweeks to completion.
Time saved = (100 – 80) / 100 = 20/100 = 20% time reduction or 20 mwks saved, not 33.
What did we get from this application of overtime compared to the original?
- 20 mnwks LESS of normal 40hrs =20×40= 800hrs less at normal 1x rate
- 80 mnwks at 20hrs/wk at OT, 1.5x rate =80×20= 1600hrs more at 1.5x rate
- Net cost 1600 x 1.5 – 800 x 1 = 1600 equivalent extra cost hrs over base 4000.
- Time saved (100-80)/100 = 20%
- Cost increased 1600/4000 = 40%
This simple example shows the full hourly time savings is not realized due to lost productivity plus many of the hours worked are at a higher cost. Though the initial basic OT estimate forecast 33% time saved at 20% extra cost, that scenario actually saved only 20% time and added 40% cost, double the initial budget.
If this was initially a 30 month project, with approximately 35% of the cost in labor, then overtime saved 6 months time, but added 15% inflation to the total cost.
There’s a significant difference in the original un-adjusted OT estimate of time/cost versus the OT time/cost analysis for nonproductive hours. That would be a serious mistake in estimating and could have serious cost implications against the budget.
This will vary with the OT scenario selected or any other data set used, but generally the more days and longer hours worked, the higher the extra cost ratio. Of course, a better way to accomplish a tightened schedule might be to add a second shift rather than work men longer hours. However, in times of restricted labor supply that might not be feasible.
See this blog post for OT productivity loss rates Overtime Isn’t Always What It Seems – Lost Productivity Construction
The last time construction jobs and workload were balanced was 2005. From 2006 through early 2011, workload dropped 15% greater than the decline in jobs. In other words, compared to 2005, contractors started the post-recession period in 2011 with 15% less workload on hand compared to the number of workers kept on staff and that resulted in the period 2006-2011 posting the largest productivity decline ever recorded.
For a discussion on data plotted 2001 to 2011, see this post Jobs vs Construction Volume – Imbalances. In the 2001-2011 plot above, jobs and workload are set to zero baseline in Jan 2001. This shows all of 2001 through 2004 that jobs/workload was balanced. The gap between the red and the blue lines above is the variance from zero change in Jobs/Workload balance. By Jan 2011 there was a 15% workload deficit.
The 1st quarter of 2011 was a dramatic turning point. Both jobs and work volume began to increase. To visualize the variance since Jan 2011, the following plot resets jobs and workload to zero baseline in Jan 2011.
From Jan 2011 to Jun 2015, construction volume increased 24% in 4 1/2 years. Staffing output increased 19% in the same period. Contractors may still feel the effects from not being able to grow staff at that same pace as volume during that period. However, we did see the larger work volume increases make up 5% of the 15% workload deficit from the previous period 2006-2011, but it loses sight of the fact that after almost five years we had not recouped the entire lost work output from all the other 10% staff imbalance that still remained.
Work output is defined as jobs x hours worked. Construction volume is defined as spending minus inflation.
From Jul 2015 to Oct 2017, volume increased just over 1% but jobs output grew by almost 7%. During that two year period, new jobs created plus the change in hours worked by the entire workforce grew 6% more than workload. Jobs increased greater than construction volume increased. The plot shows most of that variance occurred in 2015.
Shifting the time periods slightly gives another impression of the data, overall not much different. In discussions about Construction skilled labor shortages, it’s important to understand, both construction spending and volume are at record growth levels and jobs, since recession, and in last 3 yrs, have matched volume growth.
Overall, in the seven-year post-recession period Jan 2011 to Oct 2017, volume increased 25% and jobs output increased 26%. There seems very little room to be calling this a jobs shortage. Of course, this does not address skills.
So here we are most of the way through 2017 and if we look back at the last 11 years, not only are jobs once again increasing faster than workload, but also in total since 2005 we still have 14% staff that would need to be absorbed by new workload to return to the previous jobs/workload productivity balance.
Maybe it’s time we stop calling this a jobs shortage and start referring to it as a productivity challenge that needs to be turned around.
For an expansion of more information on this topic see Jobs vs Construction Volume – Imbalances posted 8-8-17. Included is the 2001-2011 plot that explains all of 2001 through 2011.
Also, Feb 208 article breaking out residential and nonresidential sectors shows surplus in nonres and deficit in residential Residential Construction Jobs Shortages
Attached PDF of my Forecasting presentation delivered 5-22-17 at Advancing Building Estimation in Houston
A few bullets from this presentation
- Construction Starts is not construction spending
- Cash flow = Spending = Revenue
- Revenue is not Volume of work
- Spending minus inflation = Volume
- Understand what’s in an Index to avoid misguided inflation adjustments
- We can’t ignore productivity
- Spending activity has just as much influence on inflation as labor and material cost.
Slides in this presentation come from the following articles: