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Infrastructure Construction Expansion – Not So Fast

Only once in 25 years have heavy engineering construction jobs increased more than 5% in one year (7.5% in 2018, 72,000 new jobs). Most of the time jobs growth is under 4% (40,000 jobs). Average growth the last 12 years (see notes below) is near 3% or 30,000 jobs per year.

U. S. Bureau of Labor Statistics (BLS) national data shows there are currently 1,078,000 Heavy Engineering jobs. In 2019 there were 1,084,000. There was a loss of nearly 100,000 heavy engineering jobs in early 2020 due to the onset of the pandemic. In 2022, heavy engineering jobs have been nearly constant, just above 1,070,000 the entire year.

Highway/Bridge comprises approximately 30% of all heavy engineering spending, so supports about 300,000 jobs per year.

The current forecast for new construction starts has increased the forecast for spending growth dramatically above previous years. Both starts and spending statistics give an indication of what to expect in the jobs situation. The spending forecast is indicating a need for a large increase in jobs to support the new work. Spending (also consider inflation) is the critical value that determines the need for jobs. Without sufficient jobs, the spending cannot take place. If jobs do not increase to support the forecast spending, the timeline for the spending very likely will get extended.

It takes 400 jobs per year to put in place $100 million of heavy engineering construction in the year. (Some types of work would take 500 jobs, but I’ll work with 400 here). A construction program that hypothetically adds $1 billion of new construction starts in a year would see that work put in place (for Highway work) approximately over the next few years at a ratio similar to a 15:30:35:20 schedule, $150 million the 1st year, $300 million the 2nd year, $350 million the 3rd year and $200 million in the 4th and 5th years. To support $150 million growth in the 1st year would require 600 new jobs. To support an increase of $1 billion in spending in one year would require 4,000 new jobs.

How will the average growth in jobs affect the growth in new starts and forecast spending?

Modeling the new starts forecast, based on the spending schedule outlined above, projects the spending forecast for Highway/Bridge work over the next few years will increase by $15 billion/year. This would indicate a need to add 15 x 4,000 = 60,000 new highway construction jobs each year in 2023, 2024 and 2025. But the entire heavy engineering jobs pool has increased by that amount only once in 25 years and average growth for all heavy engineering jobs is only 20,000 jobs/year. If we take out 2020, when jobs plummeted, the average growth from 2011 to 2022 was 30,000 heavy engineering jobs per year. Keep in mind, highway is only 30% (6,000 to 9,000) of those averages. This indicates it will be very difficult to support spending growth of this magnitude. While the starts projections and resulting spending forecast indicate rapid growth, this market sector has never experienced spending or jobs growth this fast and it is likely that growth will be slower than indicated.

Some of this added work will be absorbed into the existing workforce, backfilling a large deficit in business volume. See this short post Construction Spending – Volume – Jobs Since the Pandemic, nonbuilding construction volume (spending minus inflation) is down 20%, but nonbuilding 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%.

Aside from backfilling volume of work, this shows a shortfall of workers that would likely be needed to support the increased workload. The labor force is insufficient to accommodate that large an annual increase in spending. This could result in one or more of these outcomes: either the workforce must somehow increase faster, or the project spending could slow and duration would get extended, which is more likely.

Jobs shortfall to support 2022-2026 spending identifies unsupported need. If jobs cannot be filled, annual spending will be lower and construction timeline would get extended.

Currently, national construction unemployment rate is near or under 4%. That is an extremely tight jobs market, not an easy growth situation. Typically, when unemployment is in the 6% to 8% range there are workers on the sidelines ready to go right back to work. Unemployment seldom falls below 5%. The current jobs situation and unemployment rate seems to indicate there are few workers ready and available to support an immediate increased workload. This adds to the difficulty of expanding the workforce at a rapid rate.

In this analysis, the potential rate of jobs growth and the current unemployment rate both suggest that the projected rate of spending growth would not be supported. A slower rate of spending leads back to reducing starts.

See Also Burning Questions – Recession, Labor, Infrastructure

Construction Spending – Volume – Jobs

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 Briefs Nov’22

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%.

STARTS

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.

See also Construction Year-End Spending Forecast Dec’22

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%.

SPENDING FORECAST

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.

LABOR PRODUCTIVITY

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 and Inflation

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.

Burning Questions – Recession, Labor, Infrastructure

I gave two conference presentations in the past month. The most pressing questions from the audience were:

Are we headed into a recession? When will recession start?

What can be done about the labor shortage?

How can we support all the infrastructure work that is about to begin?

RECESSION

There is no question the sizable drop in starts in 2020 lead to a downturn in construction spending, mostly felt in 2021, but extending somewhat into 2022. However, this quickly turned around for residential spending and nonres bldgs spending is now past the low point caused by the pandemic initiated slowdown. With new construction starts to date at all-time highs and the forecast for new construction starts in the pipeline, it’s hard to envision how this would lead to a construction recession.

  • In 2021, new starts increased 17%. Residential +21%, Nonres Bldgs +15% and Nonbldg +9%.
  • In 2022, new starts are forecast up 11%. Residential +10%, Nonres Bldgs +18% and Nonbldg +4%.
  • In 2023, new starts are forecast up 10%. Residential +12%, Nonres Bldgs +7% and Nonbldg +11%.

Total of all starts year-to-date in 2022 are up 6% over Jan-May 2021. Nonres bldgs starts are up 17% year-to-date. For the past 6 months, Dec’21 to May’22, residential construction starts posted 5 of the 6 highest months ever. The 6mo total for residential starts is the highest 6mo total ever recorded, up 4% over the previous 6mo record, posted in 2021.

Residential new starts get spent at a ratio of 70:30. Nonresidential Bldgs spending from new starts, on average, gets spent over the next 3 years in the ratio of 20:50:30. That is, 20% of spending from all starts within the year gets spent within the year started, 50% gets spent in the following year and 30% gets spent in the 3rd and sometimes 4th year. So from this we can say, if new starts are up 10% for the year then spending from that source will increase 10% x 20% or 2% the 1st year, 10% x 50%, 5% the 2nd year and 10% x 30%, 3% the 3rd year. If we get 3 consecutive years of growth in new starts there would be no downward pressure on spending for the next 3 to 4 years.

In the 2nd half of 2021, residential starts, although still strong, posted a few lower monthly totals. Although 2022 spending will still finish the year up, these lower monthly starts from late 2021 will work to cause a slight spending dip in the 2nd half of 2022. Nonresidential Bldgs spending is slowly increasing in 2nd half 2022. Nonbldg spending is flat or very slowly decreasing. The net effect is spending will post a decline in 4 of the next 8 months of 2022, but the total declines may not result in 2 consecutive quarters of declines. By the time we head into 2023, all three major construction sectors are in a growth pattern.

So, we will see a few months of spending declines, but the new starts pool of work is growing, not decreasing. The current forecast model is predicting no recession on the horizon.

LABOR SHORTAGE

This next plot shows labor and volume of work (spending minus inflation) to support that labor growing equally, albeit with short-term peaks and troughs, from 2011 to 2018. In fact, this equal growth extends far back with only few years causing exception to this pattern. This plot, and the extension of this plot to older data, shows that normally, labor increases at the same rate as volume. You can see that 2018 posted a significant drop in volume while jobs continued to increase. This departure had nearly corrected itself by Jan 2020.

The most recent construction spending report, issued July 1, revised unadjusted spending data for 2020 and 2021, both years added $30+bil. That brought volume up those years on this plot. The current spread between jobs and volume of work is still 10%.

In May of 2020, jobs were already on the rebound, but the volume of work was not. Work volume did recover some at the end of 2020 but then fell again, as was predicted, into mid-2021. In May of 2020, jobs and the volume of work were near balance. Since May of 2020, spending increased by 22%, but most of that was inflation. Since May 2020, actual work volume increased by only 1.5%. Jobs increased by 9%.

The last time the normal jobs/volume growth pattern was disrupted like this was 2006, the only other time in the last 25 years this occurred.

Volume, not spending, supports jobs. If volume is down, support for more jobs drops. If jobs increase while volume is declining then productivity is declining and the number of jobs required to put-in-place $1 billion of construction volume increases. At the same time, the inverse, the amount of volume put-in-place per job, decreases. This productivity loss drives up construction labor cost inflation and the need for additional labor to complete the job.

edited/added 8-6-22 Where the construction jobs are:

From Feb 2020 to Jul 2022 Nonres Bldgs and Nonbldg jobs are down 3.5% and 1.5%. Volume of work is down 20%.

Residential jobs are up 6.5%. Rsdn volume is up 14%.

It’s not quite that bad in either sector because some workers classified and counted as nonresidential perform work in the residential sector.

Total jobs up 1%. Total volume down 7%. That’s a slip of 8% in productivity. If labor is only 30% of total construction cost, an 8% slip in productivity is a 2.4% increase in inflation. That’s in addition to changes in wages.

INFRASTRUCTURE

The current administration has approved an infrastructure spending bill that earmarks approximately $500 billion for construction spending. It will take several years to start all this work.

The infrastructure spending bill may fund construction for a variety of buildings and non-building types of construction, for example, highway, water and sewer, educational, healthcare, etc. Rather than strictly classified as infrastructure, or as commonly referred to as nonbuilding construction, this bill will fund some forms of buildings and non-building construction in the public construction sector.

The total of all public construction is only 25% of all construction. This subset of construction totals about $360 billion in annual construction spending. It has never increased by more than $37 billion in spending ($35 billion in volume) in a year. Average growth is closer to $10-$15 billion/year. This public sector of construction does not have the capacity to increase by $100 billion/year.

As you can see in the plot above, it takes about 5000 jobs to support $1 billion of volume for 1 year. So, increasing volume by $35 billion in one year would require 35 x 5000 = 175,000 new jobs for that year. Keep in mind, this is to support a subset of construction that is only 25% of all construction.

Jobs rarely (4 out of 50 yrs) increase by more than 400,000 in one year for all construction. Even taking out the 13 years when jobs dropped, the average jobs growth for the past 50 years is only 220,000/year for all construction. That would seem to indicate the average growth for the public sector, at 25% of all construction, averages only 55,000 jobs/year.

Total all construction for the three years 2022-2023-2024 is forecast to increase $140 billion, $117 billion and $116 billion. The remaining 75% of the construction industry still adds a lot of demand for growth and jobs beyond just that of the public sector that gets a boost from the infrastructure bill. But after adjusting for inflation, the growth in volume over this three-year period is only about $120 billion. That would generate a need to create 600,000 new jobs over the next three years. About 25% of those jobs support the infrastructure funded growth.

If the infrastructure spending bill adds $35-$40 billion/year in spending, $30-$35 billion/year in volume, the need would be 150,000 to 175,000 jobs/year to support that 25% of the construction industry. Since it is unlikely the public sector of construction could add that many jobs, it is more likely the amount of construction spending added yearly will be somewhat lower.

Infrastructure has a slower spending curve than the 20:50:30 for nonres bldgs, roughly more like 15:40:30:15. If $100 bil of new contract awards start in 2022 then spending would be $15 bil in 2022, $40 bil in 2023, etc.. At $100 bil of new starts per year, the highest one-year growth would be $40 bil, probably double the pace the sector can grow.

Construction Jobs and Spending Briefs 4-1-22

Construction Jobs report for Mar 2022 shows total jobs up 19,000 from Feb

Rsdn jobs +7,600, Nonres Bldgs +6,300, Civil +5,000

Although construction jobs increased by 19,000 in March, total hours worked dropped by 1.8% from Feb, so total workforce output is down.

It’s real hard to compare construction jobs growth by sector. If you work for a concrete firm or structural steel firm, with firm doing primarily nonresidential work, but you are out there putting in concrete or steel for a high-rise multifamily buildings, your job is still classified as nonresidential.

Jobs are up 82,000 year-to-date, 1.1% from Dec, but that’s also up 3.5% from ytd 2021. With the latest quarter at +1.1%, jobs are increasing at a rate of 4%/year. But inflation adjusted spending, building activity, is expected up only 2.5% in 2022, after dropping -2% in 2021. Jobs increased 2.5% in 2021.

2022 spending started the year at the highpoint. I expect a slow decline in monthly spending in all sectors of 2% over the 2nd half. That provides no support for jobs growth.

Construction jobs have nearly returned to pre-pandemic levels. The problem with construction jobs having returned to pre-pandemic levels is the level of inflation adjusted construction volume of activity that is needed to support those jobs is still 5% below Feb 2020 and 13% below the 2006 peak. So since Feb 2020, jobs are back to that level, but volume is not so productivity has dropped by 5%.

Construction Spending is up +10.4% year-to-date (in 2 months!) mostly driven by +15.5% ytd Residential.

A plot of residential construction spending inflation adjusted. Taking out inflation shows volume of building activity. Perhaps the trend in residential is strong enough to keep going.

Total spending is up +4% in 3mo since Nov 2021 (and 10% ytd-2mo), but I don’t expect this rate of growth to hold. However, this and any other changed data inputs revises my 2022 spending forecast.

Examples of big changes since initial forecast:

Manufacturing spending has increased so much in Jan-Feb, (up 35% ytd) that even if the next 10 months finish flat year/year, Mnfg will still finish up 5% for 2022.

Residential new starts for the latest 3 mo, Dec-Jan-Feb, avg is as high as any quarter last year. Nearly all of this spending occurs in 2022.

Construction buildings cost inflation over the last 4 years is up 25%. Labor cost, wages up 15% & productivity down 7%, is up 22%. But labor is 35% of total building cost so 22% x 35% = labor is 8% of that total 25% building cost inflation. Fully 1/3 of construction inflation over last 4 years went into workers pockets.

Construction Jobs Outlook 10-11-21

The most recent BLS jobs report was released Oct 8, 2021. I expected construction jobs to decline. For the last 4 months, volume of work has been flat at 2% below the 1st quarter. My forecast indicated no support for jobs growth, but jobs increased.

11-5-21 update Construction jobs report for October added 44k jobs, but The Story once again is in hours worked. Hours dropped 3.5% this month from 40.1 to 38.7. Even though jobs increased by 44k (+0.7%), actual total workforce hours worked dropped 2.8%. See plot at bottom of report that shows Oct jobs vs volume.

Construction added 22,000 jobs in September. Jobs have increased only 4 out of 9 months this year. Since a large increase of 93,000 in March, construction has gained only 6,000 jobs. For all of 2021, jobs are up by 47,000. But after a brief increase in the 1st quarter 2021, volume of work is down, now down 2% since Q1 2021, only 1% above the lowest point since the onset of the pandemic and 6% below the pre-pandemic level.

In March and April of 2020 we lost 1.1 million jobs. But every month in 2020 after that we gained back jobs, all of that driven by large gains in residential work. There was no recovery in any nonresidential work in 2020. In fact, all nonresidential work continued to decline throughout the year. How much support did we get for jobs growth?

Inflation Does Not Support Jobs

We cannot overlook the affect of inflation. As of 10-14-21, nonres bldgs inflation for 2021 is estimated at 4.6% and residential inflation is estimated at 12.9%. 

Inflation adds to total spending but adds nothing to total work volume. Construction spending minus inflation (Volume) is what supports jobs. Spending is always reported in Current $, the value of the dollar at that time. Spending minus inflation is Constant $. Constant $ = Volume. Most of the increase in residential construction spending in these past two years is INFLATION. Nonresidential spending and volume are both down. There is no meaningful increase in total construction volume to support jobs growth.

Spending versus Volume through August 2021 since February 2020:

Residential spending is up +32%. After adjusting for inflation the real change in volume is up only +14%. Most of the 14% increase in volume occurred in 2020. Since Dec 2020, residential volume is up only 3.5%.

Nonresidential Buildings spending is down -17%. After adjusting for inflation, the real change in volume is down -22% (down 17% in 2020 and 5% ytd in 2021).

Nonbuilding Infrastructure spending is down -12%. After inflation, the real change in volume is down -19% (down 13.5% in 2020 and 5.5% ytd in 2021).

Residential jobs are up only 3%, but volume is up 14%. This is where the greatest need is currently.

Nonres Bldgs jobs are down 6.5%. Volume is down 22%. There is a considerable excess in jobs.

Nonbldg Infra jobs are down 5.5%. Volume is down 19%. There is a considerable excess in jobs.

Total ALL JOBS are down only 2.6%. Total Volume is down 6%. This means productivity is down.

Jobs Imbalances

The need identified in residential, and likewise the excess identified in nonresidential are not as extreme as both seem. There are a large number of jobs classified as nonresidential that actually perform residential work. Any large firm, and all it’s employees, if primary work is on nonresidential buildings, is classified nonresidential for the purpose of the jobs count. Workers are always classified by the primary classification of the firm they work for, not by the type of building they work on. However, the buildings they work on are always classified as to building type. This often occurs in large primarily nonresidential trades such as concrete, structural steel and HVAC, when working on multifamily high-rise buildings. These crossover jobs are not separable from the major classification. Therefore, most often, nonresidential jobs are overstated by workers involved in residential work and residential jobs are understated because some work is performed by firms whose primary classification in nonresidential.

(A separate issue arises from the fact that residential construction employs the largest percentage of immigrant workers, about 40% of the residential workforce, predominantly in southern states. Pew Research provided a study documenting that about 14% of all construction is performed by immigrant workers and about half of all immigrant workers are unauthorized. It is fair to suggest some portion of these residential workers are not being captured in the BLS Jobs survey, contributing to the above noted imbalances in residential jobs versus volume of work. For more information, use the search function in this blog for “Pew Research”).

Hours Worked

In the September BLS report, hours worked per week jumped to 40.0 hours form 38.8 in August. That’s an increase of 3%, an equivalent to adding 225,000 jobs. The recent increase in hours worked could also be equivalent to 40% of the residential workforce working a six-day week versus five days.

Comparisons of hours worked show a little deeper look into the jobs situation. Compared to the average monthly hours worked in the pre-pandemic 12 month period Mar 2019 to Feb 2020, which was a 13-year high: April 2020 was down 16%; Apr-May 2020 average was down 12%; Mar thru Dec 2020 average monthly hours worked was down 5.2%; 2021 year-to-date average monthly hours worked is down only 1.4%.

Now in September 2021 average monthly hours worked is within 0.5% of the peak in Feb 2020, now 1% higher than the 13-year high average in 2019. Keep in mind, current construction volume is still down 6% from Feb 2020.

The increase in total hours worked could have several different explanations: it may be a response to meet current residential demand or to rush to completion jobs that were delayed due to the pandemic; Contractors may add hours if they can’t find enough workers with the needed skills; Contractors may be adopting an approach to meet current work demands by increasing hours rather than adding jobs. Using that last approach would allow contractors to reduce hours, rather than reduce jobs, if future volume of work were to decline. There does not seem to be any increase on the horizon in nonresidential demand. Nonresidential volume has been decreasing 1% to 1.5% per month in 16 of the last 18 months. All sectors are forecast to experience volume declines for the next 6 to 12 months.

11-5-21 update Construction jobs report for October added 44k jobs, but The Story once again is in hours worked. Hours dropped 3.5% this month from 40.1 to 38.7. Even though jobs increased by 44k (+0.7%), actual total workforce hours worked dropped 2.8%. See plot at bottom of report that shows Oct jobs vs volume.

Productivity

Whenever there is insufficient growth in the volume of work to support growth in jobs or total hours worked, productivity is declining. The following plots shows volume of work (spending adjusted for inflation) plotted against jobs adjusted for hours worked. From 2011 through Jan 2018, although there are bumps in the plot, the two moved pretty closely in tandem. A big volume decline in 2018 did not result in a similar jobs decline but volume came back very close to jobs by Jan 2020. Contractors may not respond to an immediate drop in volume by cutting jobs if they anticipate a pickup in volume on the horizon. Since Feb 2020, jobs have recovered to growth, but volume has fallen and is still not in recovery mode. The next 12 to 18 months show volume struggles to recover. Jobs will be affected but contractors may not respond in like fashion.

Spending Forecast / Volume Forecast / Jobs Forecast

For the full spending forecast see Construction Spending Update 10-1-21

Construction spending is on track to increase 5.8% in 2021 over 2020. But after taking out inflation, spending minus inflation, or volume, in 2021 will be down 2.5%. Total spending increases $87 billion over 2020, but after inflation volume will actually be down $32 billion. Residential spending increases $130 billion (+20%), but after 13% inflation residential volume increases only $49 billion. Nonresidential Buildings spending decreases $34 billion but after adjusting for 4.5%+ inflation real nonresidential buildings volume falls $52 billion. Non-building Infrastructure spending decreases only $9 billion but after adjusting for 7%+ inflation real non-building volume falls $30 billion.

All sectors are forecast to decline over the next 6 to 12 months. Residential has already captured large gains this year. Forecast declines are due to moderate ups and downs in when and how strong new starts were posted. Nonresidential construction volume growth is falling due to a huge amount of nonresidential buildings starts (-22%) and to a lesser extent non-building infrastructure starts (-15%) that disappeared from April 2020 through April 2021. The affect of those lost starts, which would have had peak spending from mid-2021 to mid 2022, is such that the volume of work will continue to decline throughout 2021 and well into 2022.

Since Feb 2020, total construction volume has recovered to a point that is down 6%, but jobs have increased back to a level that is down only 2.6%. Jobs are increasing at a rate that is closer to the growth in construction spending, which includes inflation and is substantially greater than the rate of growth of construction volume.

Although jobs should follow growth or declines in volume, as the plot above from 2011 through 2017 shows, things don’t always go as the forecast predicts. If jobs growth follows more closely to volume growth, which it should, this time next year construction could be down another 200,000 jobs.

11-5-21 updated plot below to include Sept spending report and Oct jobs report

11-5-21 update Construction jobs report for October added 44k jobs, but hours worked dropped 3.5% this month from 40.1 to 38.7. Even though jobs increased by 44k (+0.7%), actual total workforce hours worked dropped 2.8%. Plot shows Oct jobs vs Sep volume.

Midyear 2021 Economic Forecast Presentation

Behind the Headlines – Construction Jobs in 2021

3-6-21

Don’t be fooled by the upturn in January nonresidential buildings construction spending.

The greatest negative impact created by the loss of nonresidential buildings new starts from Apr 2020 to Oct 2020 has not yet hit spending and jobs in this sector. Expect both spending and jobs to decline steadily throughout 2021. My current forecast shows monthly spending down on average 1%/month for 9 out of the remaining 11 months in 2021. Dec 2021 SAAR (seasonally adjusted annual rate) will be 10% below Dec 2020, 18% below Q1 2020.

Do not expect any jobs growth in construction in 2021.

We all know a project takes time to build. It starts out slow, ramps up to peak spending and staffing just after the midpoint of the schedule and tapers off to completion. Peak monthly spending on a project with a 20-month schedule occurs 10 to 12 months into the schedule.

If we record a month of new starts 20% above normal, then 10 to 12 months from now spending and jobs from projects that started in that month will be 20% higher than normal. Then it stands to reason, if we record a month of new starts that is 20% BELOW normal, then 10 to 12 months from now spending and jobs from that month will be 20% lower than normal.

The greatest impact on spending, either up or down, from changes in new construction starts, occurs at the point in time when those projects would have reached peak spending, near the project midpoint.

In April 2020, new starts for nonresidential buildings fell 40% and then averaged 30% below normal for the next 6 months. If average duration of nonresidential buildings projects is about 20 months, then the loss of new starts will result in a maximum decline in spending and jobs 10 to 12 months later. (If average duration is about 24 months, then the loss of new starts will result in a maximum decline in spending and jobs 12 to 14 months later. This analysis uses 20 months).

Declines in new starts after April 2020 were large through the entire year, but during the months April through October 2020, starts averaged down 30%. Therefore, the maximum declines in spending and jobs from this period of reduced starts will occur 10 to 12 months later, from the beginning of the period to the end, from February through August 2021. Nonresidential buildings new starts in November, December 2020 and January 2021 are still down 20% from the pre-pandemic 6mo avg. high. This means spending declines will continue past August 2021, but at a slower rate of decline.

In Q1 2020, nonresidential buildings construction spending SAAR (seasonally adjusted annual rate) was $485 billion/yr. In April and May it had only dropped 3.5%. In Dec 2020 nonresidential buildings spending was $440 bil., down 10% from Q1. By May 2021, nonresidential buildings spending will only be $420 bil. By September 2021, the rate will be down to $400 billion.

Nonresidential buildings construction spending forecast in 2021 is down 11% from 2020. Spending continues to decline 6% in 2022. Inflation makes all these numbers slightly worse. If spending is down 11% at a time when inflation is up 3%, then real volume of work is down 14%. Jobs should follow in step with volume.

Nonresidential buildings spending especially will remain below the previous high at least for the next three years, probably longer. New starts in 2021 would need to ramp up by more than 40% to push 2021 spending back up to previous levels. New starts are forecast to gain only 3% to 5% for the next two years.

Nonresidential buildings (and to a lesser extent Nonbuilding Heavy Engineering) spending and jobs losses for the next year will be much greater than the gains expected due to increases in residential spending. New construction starts in 2020 for all types of nonresidential work declined by what is adjusted to a $150 billion decrease in spending. Residential increased by $35 billion. But again, the spending from those starts is spread out over time.

Nonresidential buildings volume declines of 14% project to a loss of over 400,000 jobs in 2021 and Non-building Infrastructure is projected to drop 60,000 jobs, but Residential could experience growth next year of 250,000 jobs. That could result in net annual jobs losses of 200,000. Job losses continue into 2022 with net volume declines of 4%.

Here is a sample cash flow schedule that shows when spending is impacted by changes in new starts in 2020.

Click on chart to see larger. Use back arrow to return to this article.

This cash flow schedule is based on reduced starts in Apr-Dec 2020. All other months are considered at 100% of the pre-pandemic rate. This sample uses $10bil/mo of new starts as 100%, the high in the 1st quarter, carried out over a 10mo schedule. If the rate of starts were to remain constant at $10bil/mo, then the spending would also remain constant at $10bil/mo. The amounts carried for April to Dec represent the actual starts recorded, measured as a percent of previous high, the 1st quarter 2020, so $6.6 bil in May is 66% of the pre-pandemic highpoint average, which here is $10bil.

With the onset of reduced starts in April 2020, spending began to fall, but only a few percent. The cumulative impact to spending of all reduced starts will be months later than the initial impact. Cash flow shows maximum impact is ~50% to 60% out in time of each individual schedule. The spending in any given month includes input from starts in 10 different months. It’s when a month lines up with all the inputs from reduced starts months that spending reaches its lowest.

The bottom line of $ is construction spending per month, the sum of the contributions from the cash flow of all the still ongoing projects. That shows when greatest impact occurs. The low point in spending can be measured in months from the initial event, April 2020. But the combined effect extends well beyond the initial event (reduced starts) which started in April but lasted until December. This is why maximum impact of reduced spending for nonresidential buildings stretches over a long period in 2021-2022.

Assuming an average duration for a particular nonresidential buildings market sector is 20 months to build, deepest losses will occur 60%x20mo or 12 months later, Apr2021, and continue to Dec2021. This duration certainly varies by building type and could vary from as short as 12 months to as long as several years. Maximum impact is always 50%-60% into the duration.

Declining spending does not support jobs growth.

See Also Construction Jobs in 2020 down 220,000

See Also Projects On Hold vs Lost New Project Starts

2021 Construction Economic Forecast – Summary

Initial Construction Outlook 2021, 2-5-21, based on data from:

  • Actual Jobs data includes BLS Jobs to Jan 16th, issued 2-5-21
  • Forecast includes US Census Dec 2020 year-to-date spending as of 2-1-21
  • Forecast includes Dodge Outlook 2021 and Dec construction starts 1-19-21

SUMMARY – CONCLUSIONS

Construction Spending drives the headlines. Construction Volume drives jobs demand. Volume is spending minus inflation. Current outlook shows the most recent peak volume was 2017-2018. Total Volume is forecast to decline every year out to 2023, but Residential is rising, Nonresidential is falling.

When spending increases less than the rate of inflation, the real work volume is declining. Nonresidential buildings spending for 2020 is down -2%, but with 3% to 5% inflation, volume is down 5% to 7%. The extent of volume declines would impact the jobs situation.

STARTS – BACKLOG – SPENDING

By far the greatest impact of the pandemic on construction is the massive reduction in new nonresidential construction starts in 2020 that will reduce spending and jobs in that sector for at least the next two years. Residential continues to increase.

  • 2020 new starts declined -8%. Res +7%, Nonres Bldgs -24%, Nonbuilding -14%.
  • New starts for residential reached an all-time high in 2020. Expect up +5% in 2021.

Nonresidential construction starts in backlog at the beginning of the year provide for 75% to 80% of all spending in 2021. New starts in 2020 were down 24% for buildings and 14% for non-buildings, so backlog is down. It would be difficult to show any scenario that has these sectors up in 2021.

  • Starting Backlog for 2021 is forecast down -10%. Backlog for 2022 is forecast down -5%.

Construction has yet to experience the greatest downward pressure from the pandemic. After hitting a post-pandemic spending high in December, spending and jobs losses won’t hit bottom until 2022. Nonresidential declines outweigh Residential gains.

  • Spending forecast for 2021 is up +1.4%, but nonresidential buildings is down -11%.
  • Almost all gains in spending are due to large 12%/yr gain in residential.

The largest declines in 2021 spending are Lodging -37%, Amusement/Recreation -26%,    Manufacturing -19% and Power -15%.

PROJECT COST ESCALATION – INFLATION

  • Inflation for nonresidential buildings near 4% the next few years. Residential 5% to 6%.

VOLUME – JOBS

Construction Jobs annual average for 2020 is down 220,000 jobs. The current spending forecast is indicating that December 2020 was the highpoint for jobs. Residential jobs will be up in 2021, but Nonresidential Buildings jobs are down steep. Net jobs will be down 15 of next 18 months. Forecast 2021 net annual average jobs losses of -200,000. Nonresidential Buildings 2021 jobs losses will outweigh residential gains.

Selected slides from Feb 2021 Construction Outlook Presentation

EdZ Econ Feb 2021 SAMPLE SLIDES PDF

Read More 2021 Construction Economic Forecast

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