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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.
The most watched indicators of the rate of inflation are the costs of various construction materials and the labor needed to install them. However, the level of construction activity has a direct influence on labor and material demand and margins and therefore on construction inflation.
One of the best predictors of construction inflation is the level of activity in an area. When the activity level is low, contractors are all competing for a smaller amount of work and therefore they may reduce margins in bids. When activity is high, there is a greater opportunity to submit bids on more work and bid margins may be higher. The level of activity has a direct impact on inflation.
This analysis is national level data.
2-10-22 See the bottom of this post to download a PDF of the complete article.
update 5-3-22 This article AND the attached PDF downloadable document have been updated to include 1st qtr 2022 inflation updates.
update 5-8-22 This article AND the attached PDF downloadable document have been updated to include changes in inflation in PPI factors.
End of updates
The construction data leading into 2022 is unlike anything we have ever seen. Construction starts were up in 2021, but backlog leading into 2022 is down. That is not normal. Backlog is rarely down and then usually when starts have been down the previous year. In this case the starts declined in 2020, but that 2020 decline was so broad and so deep, even with an increase in starts in 2021, backlog to start 2022 has not yet recovered (to the start of 2020). Spending for 2021 was up 8%, but after adjusting for inflation, real volume after inflation was down. Last time that happened was 2006 and 2002, the only two other times that happened in the last 35 years.
A significant impact of the pandemic on construction is the loss of spending due to the massive reduction in nonresidential construction starts in 2020. Those lower starts reduced nonresidential construction spending in 2020, but more-so in 2021, and in some markets will extend lower spending into 2022 and 2023. The most unexpected change was that residential spending continues a strong increase.
- 2020 new starts declined -7%. Res +6%, Nonres Bldgs -18%, Nonbuilding -15%.
- 2021 new starts increased +18%. Res +22%, Nonres Bldgs +18%, Nonbuilding +8%.
- Forecast 2022 starts are up +11%. Res +10%, Nonres Bldgs +18%, Nonbuilding +2%.
Nonresidential construction volume appears now will experience only slight dip mid-2022, the maximum downward pressure from the pandemic is past. Total All Volume, spending minus inflation, is expected to again reach the same bottom in mid-2022 as in 2021. That should impact jobs, but we haven’t seen jobs react to volume losses as would be expected. Jobs growth without volume growth to support those jobs is a productivity decline, increasing inflation.
Spending for 2021 is up 8%, but nonresidential buildings spending is down 4%. Almost all gains in 2021 spending are due to the 23% gain in residential.
Deflation is not likely. Only twice in 50 years have we experienced construction cost deflation, the recession years of 2009 and 2010. That was at a time when business volume dropped 33% and jobs fell 30%. During two years of the pandemic recession, volume reached a low down 8% and jobs dropped a total 14%. But we gained back far more jobs than volume. That means it now takes more jobs to put-in-pace volume of work. That increases inflation.
No one predicted 2021 construction inflation. In Jan 2021, I predicted Inflation for nonresidential buildings near 4% and Residential inflation at 5% to 6%. Looking back, we now see nonresidential buildings inflation is 7%, the highest since 2006-2007 and residential inflation is 13%, the highest since 1977-1979, in part driven by the highest rates of increase in materials on record.
- 2020 Residential Inflation 4.5%, Nonres Bldgs 2.6%, Non-bldg Infra Avg -0.3%
- 2021 Residential Inflation 13.2%, Nonres Bldgs 6.7%, Non-bldg Infra Avg 7.5%
- 2022 Residential Inflation 11.7%, Nonres Bldgs 6.3%, Non-bldg Infra Avg 5.5%
General construction cost indices and Input price indices that do not track whole building final cost do not capture the full cost of inflation on construction projects.
Selling Price is whole building actual final cost. Selling price indices track the final cost of construction, which includes, in addition to costs of labor and materials and sales/use taxes, general contractor and sub-contractor margins or overhead and profit.
When construction activity is increasing, total construction costs typically increase more rapidly than the net cost of labor and materials. In active markets overhead and profit margins increase in response to increased demand. These costs are captured only in Selling Price, or final cost indices.
Consumer Price Index (CPI), tracks changes in the prices paid by consumers for a representative basket of goods and services, including food, transportation, medical care, apparel, recreation, housing. This index in not related at all to construction and should not be used to adjust construction pricing.
Producer Price Index (PPI) for Construction Inputs is an example of a commonly referenced construction cost index that does not represent whole building costs. The PPI is a materials cost index. Engineering News Record Building Cost Index (ENRBCI) and RSMeans Cost Index are other examples of commonly used indices that do not capture whole building cost.
Construction Analytics Building Cost Index, Turner Building Cost Index, Rider Levett Bucknall Cost Index and Mortenson Cost Index are all examples of whole building cost indices that measure final selling price (for nonresidential buildings only).
Residential inflation indices are primarily single-family homes but would also be relevant for low-rise two to three story building types. Hi-rise residential work is more closely related to nonresidential building cost indices.
A nonresidential buildings index would be representative of commercial construction or hi-rise residential construction, since hi-rise residential is quite similar too commercial construction and in fact substantial portions of the building are constructed by firms classified as commercial constructors.
The Construction Analytics Infrastructure composite index is useful only for adjusting the total cost of all non-building infrastructure. Individual types of non-building infrastructure require attention to specific indices related to that type of work.
Post Great Recession, 2011-2020, average inflation rates:
Nonresidential buildings inflation 10-year average (2011-2020) is 3.7%. In 2020 it dropped to 2.5%, but for the six years 2014-2019 it averaged 4.4%. In 2021 it jumped to 9%, the highest since 2006.
Residential 8-year average inflation for 2013-2020 is 5.0%. In 2020 it was 5.3%. In 2021 it jumped to 14%, the highest since 1978.
30-year average inflation rate for residential and nonresidential buildings is 3.7%. Excluding deflation in recession years 2008-2010, for nonresidential buildings is 4.2% and for residential is 4.6%.
- Long-term construction cost inflation is normally about double consumer price index (CPI).
- In times of rapid construction spending growth, nonresidential construction annual inflation averages about 8%. Residential has gone as high as 10%.
- Nonresidential buildings inflation has average 3.7% since the recession bottom in 2011. Six-year 2014-2019 average is 4.4%.
- Residential buildings inflation reached a post-recession high of 8.0% in 2013 but dropped to 3.5% in 2015. It has averaged 5.3% for 8 years 2013-2020.
- Although inflation is affected by labor and material costs, a large part of the change in inflation is due to change in contractors/supplier margins.
- When construction volume increases rapidly, margins increase rapidly.
Historically, when spending decreases or remains level for the year, inflation rarely (only 10% of the time) climbs above 3%. Avg inflation for all down/flat years is less than 1%. In 2021, spending was down for nonresidential buildings and non-building. Inflation for both was over 8%.
Nonresidential buildings inflation, after hitting 5.3% in 2018 and 4.8% in 2019, fell to 2.5% in 2020, lower than the 4.5% average for the previous four years. In 2021 it was 9.0%. Nonresidential buildings spending has not kept up with inflation since 2016. Spending needs to grow at a minimum of inflation, otherwise volume is declining. Since 2016, inflation exceeded spending by almost 20%.
Nonbuilding Infrastructure inflation, from 2013 to 2017 averaged less than 1%, but then jumped to 5% in 2018 and 2019. Inflation fell to -0.2% in 2020, but jumped to 9.1% in 2021.
Residential construction inflation in 2019 was only 3.4%. However, the average inflation for six years from 2013 to 2018 was 5.2%. It peaked at 7% in 2013 but dropped to 3.2% in 2015 and 3.4% in 2019. Residential inflation is 2021 was 14.0%.
Producer Price Index (PPI) Material Inputs (which exclude labor) to new construction averaged less than 1%/yr. from 2012 to 2017. Cost decreased in 2015 and 2016, the only negative costs for inputs in the past 20 years. Input costs averaged over 5% for 2018-2020. Then in 2021 input costs soared to 22%, the highest ever recorded.
Even though material input costs were up for 2020, nonresidential inflation in 2020 remained low, possibly influenced by a reduction in margins due to the decline in new nonresidential buildings construction starts (-18%), which is a decline in new work to bid on. An 18% drop in new nonresidential buildings starts within one year equals a loss of near $100 billion of spending that would occur over the next 2-4 years. Nonbuilding starts were down 15%, equivalent to a loss of $50 billion in new work that would likely have been spread over 2-5 years. Residential starts in 2020 increased 6%, adding about $35 billion in new spending spread over 2 years.
Nonresidential buildings inflation for 2020 dropped to 2.6%, the first time in 6 years below 4%. Spending fell only 1.8% but after accounting for 2.6% inflation, volume decreased 4.4%. Nonresidential volume dropped every month in 2020 after the February 2020 peak, down 19% by December, but that’s not the bottom. Declines continue into 2021.
Nonbuilding Infrastructure in 2020 posted mild deflation of -0.3% after +5% in 2019, but averaged only 2%/yr. since 2011. 2020 spending increased only 0.7%. After accounting for -0.3% deflation, volume increased 0.4%. Public infrastructure inflation, up only 1.2% in 2020 after reaching over 4% in 2018 and 2019, averaged 2.7%, since 2011.
Residential inflation averaged 4.5% for 2020. Remarkably, spending increased 15% and 2020 volume was up 10%. Residential business volume dropped 9% from the March 2020 peak to the May bottom, but then by December recovered 16% to hit a post Great Recession high, 11% above Dec 2019.
Most nonresidential construction markets had a weaker spending performance in 2021 than in 2020. Approximately 40%-50% of spending in 2021 is generated from 2020 starts, and 2020 nonresidential starts ranged down 10% to 25%, several markets down 40%.
Nonresidential buildings starts fell 18% in 2020, but gained 18% in 2021. Nonbuilding starts were down 15% in 2020, then added 8% in 2021. Residential starts increased 6% in 2020 and 22% in 2021.
Nonresidential buildings spending fell 4.4% in 2021. Nonbuilding spending was down 1.1%. Residential spending was the star of the year, up 23%, the largest yearly % gain on record.Nonresidential buildings inflation in 2021 jumped to 6.7%, the highest since 2007. Non-building average inflation was 7.5%, the highest since 2008. Residential inflation in 2021 jumped to 13.2%, the highest on record back to 1967.
After adjusting for inflation, total all construction volume in 2021 was down -1.1%. Residential volume for 2021 was up +10% while Nonresidential Bldgs volume was down -10% and non-building volume was down -7%. Jobs average over the year 2021 increased +2.3%. Volume was down -1.1%.
U.S. Census Single-Family house Construction Index gained only 4% in 2020. The index is up 11.7% for 2021. The index has posted steady growth throughout 2021. Thru February 2022, over the last 4-5 months, the year/year rate of increase in this index has jumped from 12% yoy to 17% yoy. https://www.census.gov/construction/nrs/pdf/price_uc.pdf
Turner Construction Cost Index average annual for 2021 is up only 1.9% from 2020. That is unusually low, well below the range of 5% to 16% and the average of 9% for other nonresidential buildings indices. http://turnerconstruction.com/cost-index
Rider Levitt Bucknall nonresidential buildings index average for 2021 is up 4.8% from 2020. https://www.rlb.com/americas/
Mortenson’s cost index of nonresidential buildings data is posted through Q4 2021. The annual average inflation for 2021 is up 16% over 2020. https://www.mortenson.com/cost-index
RSMeans Nonresidential buildings index for 2021 is up 9.11%.
Engineering News Record (ENR) BCI inputs index for 2021 is up 10.0%. The BCI is up 5.3% year-to-date for the first 4 months of 2022.
Producer Price Index tables published by AGC show input costs to nonresidential buildings up about 18% for 2021. Final costs of contractors and buildings is up 5.3%. PPI Inputs for March show residential inputs up 8.2% and nonresidential buildings inputs up 12.6% ytd for 3 months. Also the average final demand increase cost for residential is up 16% and final demand cost for nonresidential bldgs is up 4.8% in the 1st quarter. https://www.agc.org/learn/construction-data
A caution here. AGC reports inflation for the year as the value reported in December of the year. Many others report the average inflation for all 12 months. These two reporting methods cannot be mixed. Construction Analytics has recently revised PPI data to reflect annual average inflation.
AGC April Construction Inflation Alert “The construction industry is in the midst of a period of exceptionally steep and fast-rising costs for a variety of materials, compounded by major supply-chain disruptions and difficulty finding enough workers—a combination that threatens the financial health of many contractors. No single solution will resolve the situation.”
New construction starts reported by Dodge thru Feb are up 15% over the same period in 2021, with residential at a new high and nonresidential near the previous high. Feb 2022 total was the highest level of new starts on record. High levels of activity often lead to higher levels of inflation.
Wage offerings are increasing (up 6% in 2021), productivity is declining (down 7% in last 4 years) and there are many instances of material shortages or delays in delivery (lumber, windows, roofing, cabinets, mechanical equipment, appliances, etc.). These issues are all present now and all work to increase inflation.
Steel Mill Products prices are up over 100% in 2021, but steel mill products includes all kinds of steel for all uses including automobiles and appliances. Construction uses slightly less than 40% of all steel and that is predominantly fabricated structural steel.
Fabricated Structural Steel prices are up 25% in 2021.
Here’s an example of how a PPI cost change affects the total final cost of the product installed. The mill price of steel is about 25% of the final price of steel installed. The other 75% of the cost is detailing, fabrication, delivery, lifting, labor and equipment for installation and markup. 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, electrical 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 nonresidential building cost. Structural Steel only, installed, is about 9% to 10% of total building cost. The other 6% of total steel cost applies to all buildings. If mill price is up 100%, then subcontractor final cost is up 25%. With all steel representing 16% of total building cost then final cost of building would be up 4%.
Steel Prices Reach Levels Not Seen Since 2008 by The Fabricator
2021 Input costs for Residential and Nonresidential Buildings is the highest on record. Materials prices support high inflation into 2022. But some sources expect gains to moderate from 2021.
For up to data 2022 PPI see Producer Price Index PPI Tables 2022
Could a recession bring on deflation?
Deflation is not likely. Only twice in 50 years have we experienced construction cost deflation, the recession years of 2009 and 2010. That was at a time when business volume went down 33% and jobs were down 30%. In 2020, business volume dropped 7% from February to May. By October, volume reached a low for the year, down 8%. Volume of work seemed to be recovering in the first quarter of 2021, up 3% from the October low, but then struggled most of the year. As of December 2021, volume is still down 7% from the February 2020 peak and up only 2% from the 2020 low. Jobs dropped 14%, 1,100,000+ jobs, in two months! But jobs recovered all but 3% by December 2020. As of December 2021, jobs are down 2% from February 2020 peak. We have now gained back 1,000,000 jobs. But we gained back far more jobs than volume. That means it now takes more jobs to put-in-place volume of work. That increases inflation.
Here’s a list of some 2021 indices average annual change and date updated.
- +6.7% Construction Analytics Nonres Bldgs Mar
- +5.4% PPI Average Final Demand 5 Nonres Bldgs Dec
- +5.3% PPI average Final Demand 4 Nonres Trades Dec
- +1.9% Turner Index Nonres Bldgs annual avg 2021 Q4
- +4.8% Rider Levett Bucknall Nonres Bldgs annual avg 2021 Q4
- +16% Mortenson Nonres Bldgs annual avg 2021 Mar
- +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
- +10.0% ENR Nonres Bldgs Inputs annual avg 2021 Dec
Take note of the top six indices reported here. They all represent nonresidential buildings final cost. The spread is from 2% to 16%, wider than ever seen in any other year. The average of these six is 6.7%.
Future Inflation Forecast
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, when materials shortages develop or productivity declines, that causes 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.
After adjusting for inflation, total volume in 2021 is down 1.1%. Residential volume for 2021 is up +10% while Nonresidential Bldgs volume is down 10% and Non-bldg volume is down 7%.
Total volume for 2022 is forecast up only 1.7%. After adjusting for inflation, Residential volume for 2022 is forecast up only 2%. Nonresidential Bldgs volume is forecast up 4% and Non-bldg volume is forecast down 2%.
Volume declines should lead to lower inflation as firms compete for fewer new projects. However, aside from remarkable cost increases for materials, if jobs growth continues while volume declines, then productivity declines, and that will add to labor cost inflation. Since 2010, Construction Spending is up over 100%, but after adjusting for inflation, Volume is up only 31%. Jobs are up 41%.
Notice in this next plot how index growth for ENR BCI and RSMeans, both input indices, is much less than for all other selling price final cost indices. From 2010 to 2020, Construction Analytics total final cost inflation is 103/71 = 1.45 = +45%. Input cost indices total inflation over the same period is only 103/79 = 1.30 = +30%, missing a big portion of the cost growth over time.
Nonresidential Buildings Selling Price Indices vs Input Indices
Several Nonresidential Buildings Final Cost Indices averaged over 5%/yr. in 2018 and 2019 and over 4%/yr. from 2015 to 2019 averaging +25% inflation for 5 years. Input indices that do not track whole building cost averaged only 12% inflation for those five years, much less than final cost growth. As noted previously, most reliable nonresidential selling price indexes have been over 4% since 2014. All dropped to between 2% to 3.5% in 2020.
Current and predicted Inflation rates:
- 2020 Residential Inflation 4.5%, Nonres Bldgs 2.6%, Non-bldg Infra Avg -0.3%
- 2021 Residential Inflation 13.2%, Nonres Bldgs 6.7%, Non-bldg Infra Avg 7.5%
- 2022 Residential Inflation 11.7%, Nonres Bldgs 6.3%, Non-bldg Infra Avg 5.5%
Construction Analytics Building Cost Index
As of April 2022, not all nonresidential sources have updated their Q4 inflation index. A few are still reporting only 2% to 4% inflation for 2021, but several have moved up dramatically, now reflecting between +10% to +14%. One national resource is reporting only 1.9% inflation for 2021! The 2015-2023 table has been updated to include all Q1 2022 data where available. We can still expect some minor change to 2021 and future forecasts.
The tables below, from 2015 thru 2023, updates 2021 data and includes Q1’22 data when available and provide 2022-2023 forecast. The three major sector indices, highlighted, are plotted above. NOTE, in this table and these plots all indices are set to a base of 2019=100. All original data is gathered for all indices, but since all indices have different index dates (start in different years), all data is modified to a common base date, in this case 2019. That allows all indices to be easily compared. These indices are annual average index reported at midyear. All forward forecast values, whenever not available, are estimated by Construction Analytics using long-term avg.
How to use an index: Indexes are used to adjust costs over time for the effects 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 = 111.7/87.0 = 1.284. Cost of building with midpoint in 2016 x 1.28 = 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.
Non-building infrastructure indices are so unique to the type of work that individual specific infrastructure indices must be used to adjust cost of work. The FHWA highway index increased 17% from 2010 to 2014, stalled from 2015-2017, then increased 15% in 2018-2019. During that time, the average of non-building indices would have given +12% from 2010-2014, +13% for 2015-2017 and +10% for 2018-2019. The IHS Refinery, Petrochemical plants index fell 10% from 2014 to 2016. In that same two-year period the IHS Pipeline, LNG index fell 25%. The CA Infrastructure composite index is useful only for adjusting the grand total cost of all non-building infrastructure.
Volume of Work – The Impact of Inflation on Jobs
Volume is spending minus inflation.
Construction Spending drives the headlines. Construction Volume drives jobs demand. Total Volume is forecast flat to down over the next 12 months. Residential dips 4% then recovers to current level, nonresidential buildings volume increases 6% and Non-building infrastructure volume will fall 7%.
To differentiate between Revenue and Volume you must use actual final cost indices, otherwise known as selling price indices, to properly adjust the cost of construction over time.
When spending increases less than the rate of inflation, the real work volume is declining. In 2020, Nonresidential buildings spending was down 2%, but with 2.5% inflation, so volume was down 4.5%. The extent of volume declines impacts the jobs situation. In 2021, Nonresidential Buildings jobs increased by slightly less than 1%, but construction volume was down 10%. Total all construction jobs increased by 2.3%, but construction volume was down 1.1%. Jobs are supported by growth in construction volume, spending minus inflation. If jobs increase faster than volume, that adds to productivity losses and adds to inflation.
Many construction firms judge their business growth by the revenues passing through from all jobs under contract. The problem with that, for example, is that Nonresidential Buildings spending (revenues) are expected to grow 10% in 2022, but after adjusting for inflation the actual volume of work will be up by only 4%. By this method, in part, these firms are including in their accounting an increase in inflation dollars passing through their hands. Spending includes inflation, which does not add to the volume of work and does not support jobs growth.
Total volume for 2022 is forecast up only 1.7%. Residential volume for 2022 is forecast up 2.3%. Nonresidential Bldgs volume is forecast up only 4% and Non-bldg volume is forecast down 2.4%.
Construction Spending Current Dollars
Spending includes inflation which does not add to the volume of work. 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. The sector plot below is adjusted for inflation and is presented in constant $. Constant $ show volume. Notice future residential remains in a narrow range after adjusting for inflation.
Constant $ = Spending minus inflation = Volume
Residential business volume is no stranger to hefty increases in spending and volume. In three years 2013-2015, spending increased 57% and volume was up 35%. For 2020-2021, spending increased 42% and volume was up 20%. Although residential spending remains near this elevated level for the next year, volume growth slows down in the 2nd half of 2022. Residential spending is forecast up 13% for 2022, but a forecast for 11.7% residential inflation slows volume growth to 2.3% for the year.
In January 2021, I had forecast by 3rd quarter 2021, nonresidential buildings volume would be 25% below the Feb 2020 peak. By 3rd qtr 2021 volume was down 21%. This follows the 20% decline in new starts in 2020. Most of the spending from those lost starts would have taken place in 2021. For 2022, spending is forecast to increase 10%, but inflation is forecast at 6%, resulting in volume growth of 4%.
In 2021, nonresidential buildings volume dropped 10%. Non-building volume dropped 7%. In 2022, nonresidential buildings volume should climb 4% but non-building volume falls 2.4%. In fact, the forecast shows non-building volume still drops another 4% in 2023. Although Power plants posted a massive gain in starts in 2019, declines in pipeline starts offset some of that gain. Transportation, a source of long duration projects, is also contributing to that decline. Although transportation starts were up 16% in 2021, that follows a 33% decline in starts in 2020-2021.
Below is the non-building plot, inflation adjusted. Both the nonresidential buildings and the non-building plots show there has been no substantial increase since Feb 2020 in volume to support jobs growth, and there is little to no help in 2022.
Jobs are supported by growth in construction volume, spending minus inflation. If volume is declining, there is no support to increase jobs. Although total volume for 2022 is forecast up 1.7%, with Residential volume forecast up 2.3%, Nonresidential Bldgs volume up 4% and Non-building volume forecast down 2.4%, we will not see total construction volume return to Feb 2020 level at any time in the next three years. By the end of 2023 volume is still down 3% from Feb 2020.
Construction Jobs Growth
When we see spending increasing at less than the rate of inflation, the real work volume is declining. For example, with construction inflation increasing at 3% annually, a nonresidential building spending decline of -2% would reflect a work volume decline of 5%. The extent of volume declines would affect the jobs situation.
There is a difference comparing growth to same month last year versus comparing annual averages. For Dec’21 vs Dec’20, Residential jobs are up 75k, Nonresidential Bldgs up 61k and Nonbuilding up24k. But annual averages tell a much different story.
AVG 2021 vs AVG 2020, Rsdn+153k (+5.3%), Nonres Bldgs +28k (+0.8%), Non-bldg +9k (+0.9%).
Dec vs Dec simply compares jobs at 2 points in time, without the benefit of what occurred in the other 11 months of the year, so does not tell us what took place over the year. Total labor production for the year must take into account all months. The annual average gives a much clearer indication of jobs growth over the year because it accounts for the peaks and dips of all 12 months during the year.
Jobs average over the year 2021 increased +2.3%. After adjusting for inflation, total volume in 2021 is down -1.1%. Residential volume for 2021 is up 10% while Nonresidential Bldgs volume is down 10% and Non-building volume is down 7%. Those are remarkable nonresidential declines, not seen that deep since 2010.
If jobs are increasing faster than volume of work, productivity is declining. For example, nonresidential buildings volume declined 10%, but nonres bldgs jobs increase 0.8%. That’s a 11% swing in productivity. Since labor is about 30% to 35% of the cost of a project, if productivity declines by 11%, then inflation rises by 11% x 35%, or 3.8%. The most recent year drop in volume, while jobs increased, added 4+% to nonresidential buildings inflation for the year. But some jobs counted as Nonresidential actually work on residential construction, so the individual sector data is skewed and there is insufficient detail to count those jobs. Better to look at all volume vs all jobs.
Jobs and Volume of work growth should move in tandem, as seen in the above plot from 2011 to Jan 2018. With exception of 2006, when jobs increased by 10%, but volume dropped by 5%, a negative impact 15% spread, similar to 2018, these plot lines have been moving in tandem like this, with minor differences, back to 1992. If jobs grow faster than volume, productivity is declining (a negative impact). When these plot lines grow wider apart with jobs above volume, that is a sign of a productivity decline. That loss of productivity for the workforce is a hidden aspect of inflation, not shown in pricing or wages.
What does that hidden loss of productivity for the workforce look like? How can we tell the magnitude of this impact on inflation when it is hidden, not seen in wages? It shows up in this following plot, the volume of work Put-In-Place per job.
If jobs are increasing faster than volume of work, can we tell if it’s production employees or supervisory employees? BLS reports ALL construction jobs (~7.5million) and Production jobs (~5.5million). The difference between these two data sets is supervisory employees.
Looking at the average number of construction jobs in the last 4 years, the average of 2021 jobs vs the average of 2017 jobs, production jobs increased +5%, but supervisory jobs increased +12%.
In 2011, supervisory jobs was 24% of all construction jobs. Now it is 35%. Growth in supervisory jobs has had a greater negative impact than production jobs on the spread between jobs and volume.
In January 2021, I had forecast We will not see construction volume return to Feb 2020 level at any time in the next three years. Well, unprecedented residential growth outperformed with 10% volume growth in both 2020 and 2021. Nonresidential and non-building volume since Feb 2020 are down 15% to 16%. Total construction volume since Feb 2020 is still down 2.5%. It is expected to fall another 3% in 2022. And the forecast still shows total construction volume from Feb 2020 down 2% by the end of 2023. That is a difficult environment to see jobs growth.
A final word about terminology: Inflation vs Escalation. These two words, Inflation and Escalation, both refer to the change in cost over time. However, escalation is the term often used in a construction cost estimate to represent anticipated future change, while more often the record of past cost changes is referred to as inflation. This graphic might represent how most owners and estimators reference these two terms.
Links to Articles and Data
Construction Analytics Construction Inflation Index Tables for indices related to Nonbuilding Infrastructure work and for many more links to sources.
See this post on my blog Construction Economic Outlook 2022
Download the complete (20 page) inflation article here, download button below
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.
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).
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.
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.
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.
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.
See also these articles:
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
During the period including 2011 through 2017, we had record construction spending, up 50% in 5 years, moderate inflation reaching as high as 4.6% but averaging 3.8%, record construction volume growth (spending minus inflation), up 30% in 5 years and the the 2nd highest rate of jobs growth ever recorded.
Residential spending was up 90% in 5 years, but real residential volume up only 50%. Residential inflation, at 6%/year, was much higher than all construction. Jobs increased only 33%.
Construction added 1,339,000 jobs in the last 5 years. The only time in history that exceeded jobs growth like that was the period 1993-1999 with the highest 5-year growth ever of 1,483,000 jobs. That same 93-99 period had the previous highest spending and volume growth. 2004-2008 would have reached those lofty highs but the residential recession started in 2006 and by 2008 spending had already dropped 50%, offsetting the highest years of nonresidential growth ever posted.
The point made here is the period 2011-2017 shows spending and jobs at or near record growth. Although 2017 slowed, there is no widespread slowdown in volume or jobs growth.
This 2011-2017 plot of Construction Jobs Growth vs Construction Volume Growth seems to show there is no jobs shortage. In fact it shows jobs are growing slightly faster than volume. But that just does not sit well with survey data from contractors complaining of jobs shortages. So how is that explained?
There have been cries from some quarters, including this blog, that the answer lies in declining productivity. There seems to be plenty of workers, but it now takes more workers to do the same job that took fewer in the past. As we will see, that is part of the answer, but doesn’t explain why some contractors need to fill vacant positions. To find data that might answer that question about a jobs shortage we must dig a little deeper.
The total jobs vs volume picture masks what is going on in the three major sectors, Residential, Nonresidential Buildings and Non-Building Infrastructure. A breakout of jobs and volume growth by sector helps identify the imbalances and helps explain construction worker shortages. It shows the residential sector at a jobs deficit.
7 years 2011-2017 – % Jobs growth vs % Volume growth
- Totals All Construction Jobs +31%, Volume +30%
- Nonres Bldgs Jobs +27%, Volume +19%
- Nonbldg Hvy Engr Jobs +21%, Volume +12%
- Residential Jobs +40%, Volume +54%
The totals show jobs and volume almost equal, data that supports the 2011-2017 totals plot above and what we would expect in a balanced market. But severe imbalances show up by sector. Both nonresidential sectors show jobs growth far outpaced volume growth. Residential stands out with a huge deficit, with jobs way below volume growth.
Just looking at 2017 growth shows the most recent imbalances.
2017 % jobs growth vs % volume growth
- Totals All Construction Jobs +3.4% Volume -0.8%
- Nonres Bldgs Jobs +3.3% Volume -1.6%
- Nonbldg Hvy Engr Jobs +1.7% Volume -6.0%
- Residential Jobs +3.5% Volume +4.2%
Census recently released initial construction spending for 2017, totaling $1.230 trillion, up only 3.8% from 2016. What is somewhat disconcerting is that 2017 construction spending initial reports growth of 3.8% do not even match the total inflation growth of 4.6% for 2017, indicating a -0.8% volume decline. However, as does always occur, I’m expecting upward revisions (estimated +2%) to 2017$ construction spending on 7-1-18. If we don’t get an upward revision, then 2017 will go down as the largest productivity decline since recession. Even if we do get +2% upward revision to 2017$ spending, 2017 volume would be revised up to +1.2% and jobs growth will still exceed volume growth.
Let’s look a little deeper at the data within the sectors. Each chart is set to zero at Jan 2011 so we can see the change from that point, the low point of the recession, until today. At the bottom of each chart is shown a Balance at start. That represents the cumulative surplus or deficit of jobs growth compared to volume growth for the previous 10 years prior to Jan 2011. If there are no changes in productivity, or no surplus or deficit to counteract, then jobs should grow at the same pace as volume.
There are slight differences between the data in the three sector charts and the total construction chart. The sector charts use annual avg data and the totals chart uses actual monthly data.
Nonresidential Buildings and Non-building Infrastructure, over seven years and the most recent three years, show jobs increasing far more rapidly than volume. Nonresidential Buildings started 2011 with a surplus of jobs after the recession, but Infrastructure started 2011 with a substantial deficit of jobs. Only in this last year did Infrastructure jobs reach long-term balance with work volume.
Nonresidential Buildings started 2011 with a 13% surplus of jobs and more than doubled it in the seven years following. I’ve suggested before it could be that a part of this surplus is due to companies hiring to meet revenue growth, and not inflation adjusted volume. Although nonresidential spending actually increased 43%, volume since 2010 has increased only 12%. Since 2010 there has been 30% nonresidential buildings inflation, which adds zero to volume growth and zero need for new jobs. A 43% increase in spending could lead companies to erroneously act to staff up to meet spending, or revenue, more than needed for the 12% volume increase.
This plot for residential work shows from 2011 to the end of 2017, we’ve experienced a 20% growth deficit in jobs. How many residential jobs does this 20% growth deficit represent? From Jan 2011 through Dec 2017, residential jobs increased from approximately 2,000,000 to 2,700,000. So the base on which the % growth increased over that time is calculated on 2,000,000. An additional 20% growth would be a maximum of 400,000 more jobs needed to offset the seven year deficit. But what about the imbalances that existed when we started the period?
During the residential recession from just 2005 through 2010, residential volume declined by 55%, but jobs were reduced by only 38%. For the entire period 2001-2010, total volume of work declined by 14% more than jobs were reduced. Some of the surplus jobs get absorbed into workforce productivity losses and some remain available to increase workload. It’s impossible to tell how much of that labor force would be available to absorb future work, so for purposes of this analysis an estimate of at least 5% seems not unreasonable. That would mean for 2011-2017, instead of a need for an additional 20% more jobs, the need could be reduced by 5% or 100,000 jobs.
This analysis shows a current deficit of 300,000 to 400,000 residential construction jobs. While it does also show nonresidential buildings jobs far exceed the workload and there are more than enough surplus jobs to offset the residential deficit, there would be several questions of how transferable jobs might be between sectors.
- Are there highly technical specialty jobs in Nonresidential Buildings that would not be transferable to Residential?
- What is the incidence of specialty workers engaging in work across sectors? i.e., job is counted in one sector but working in another sector.
- What has been the impact of losing immigrants from the construction workforce?
- Is the ratio of immigrant workers in Residential much higher than Nonresidential?
- Is the pay more attractive in Nonresidential construction?
- What, if any, percentage of the Residential workforce is not being counted? Day labor?
One thing is known for certain, high-rise multifamily residential buildings may often be built by a firm that is classified primarily as a nonresidential commercial builder. Therefore, some jobs that are counted as nonresidential are really residential jobs.
I think most of these would have a more negative impact on Residential jobs. However, there is some possibility that the overall deficit may not be quite as high as available data show (points 2 and 6). And there is always the possibility that we’ve crossed a threshold that has led to new gains in productivity, although to some extent, the stark differences between Residential and Nonresidential Buildings data might counter that proposition.
These two following report references both document that there is a large unaccounted for shadow workforce in construction. This workforce is probably mostly residential.
and these more recent reports adds volumes of data on immigrant labor
Unemployment and productivity includes only jobs counted in the official U.S. Census Bureau of Labor Statistics (BLS) jobs report. Both these reports document a large, unaccounted for shadow workforce in construction. By some accounts, 40% or more of the construction workforce in California and Texas are immigrant workers. Immigrants may comprise between 14% and 22% of the total construction workforce. It is not clear how many within that total may or may not be included in the U.S. Census BLS jobs report. However, the totals are significant enough that they would alter some of the results commonly reported.
The best way to see the implications that the available data do show is to look at productivity. The simplest presentation of productivity measures the total volume of work completed divided by the number of workers needed to put the volume of work in place, or $Put-in-Place per worker. In this case, $ spending is adjusted for inflation to get a measure of constant $ volume, and jobs are adjusted for hours worked.
As the Residential jobs deficit increases vs workload, this plot shows that $PIP is increasing. That makes sense. The workload continues to increase and the jobs growth is lagging, so the $PIP per worker goes up. For Nonresidential Buildings, the rate of hiring is exceeding the rate of new volume and therefore the $PIP is declining.
In boom times, residential construction adds between 150,000 and 170,000 jobs per year and has only twice since 1993 added 200,000 jobs per year. In the most recent several years expansion, residential has reached a high of 156,000 jobs in one year but has averaged 130,000 per year over 5 years. So it’s pretty unlikely that we are about to start adding residential construction jobs at a continuous rate of 200,000+ jobs per year.
If residential jobs growth were to increase by 50,000 jobs per year over and above current average growth, it would take 6 to 8 years to wipe out the jobs deficit in residential construction.
This problem is not going away anytime soon.
For more history on jobs growth see Is There a Construction Jobs Shortage?
For more on the imbalances of Res and Nonres jobs see A Harder Pill To Swallow!
For some hypotheses as to why nonresidential imbalances continue to increase see Construction Spending May 2017 – Behind The Headlines
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