Fragile, Fragmentary Recovery Continues

The construction industry posted both good and mixed news last week. The outlook is for more of the same. Construction spending hit a 2-1/2 year high in June, as widespread gains in private nonresidential categories and in both single- and multifamily homebuilding overcame continued slippage in public construction. But construction employment has been stuck near a 16-year low ever since early 2010, and the July employment report showed no improvement. Construction spending began rising in early 2011 after five years of decline. Increases were initially limited to a few private nonresidential categories. Then multifamily spending began to soar, followed by gains in single-family construction. In recent months, total construction spending has been rising roughly 7 percent year-over-year, despite 3 percent decreases in public construction. Some of the increase represents higher bid prices rather than increased numbers and sizes of projects. Yet, even the adjusted increase likely exceeds the paltry 0.1 percent rise in employment over the past year. Assuming both spending and employment are being measured accurately, there are three possible explanations for this mystery. Some of the additional output results from current workers putting in more hours: employment rose by 0.1 percent between July 2010 and July 2011, while total hours increased 0.4 percent. Another piece of the explanation comes from a changing mix of projects: the largest growth in spending was in power and manufacturing categories, which tend to be less labor-intensive than single-family homebuilding or light nonresidential categories. Third, it is possible that workers have become more productive. Going forward, it is likely that contractors will have to boost employment if they continue to build more. Will that happen? Based on projects that have been announced by a variety of manufacturers, utilities and pipeline companies, power and manufacturing construction seem sure to rise further. Private university and hospital work also is likely to increase. But the growth rate of private nonresidential construction has slowed in recent months. The outlook for multifamily construction is still bright. Vacancy rates have declined in all major markets and rents are rising enough to encourage new investment. But the outlook for the much larger single-family market remains uncertain. Public construction is still plagued by shrinking federal construction appropriations, flat or falling school district and local government revenues, and stagnant state budgets for construction. The long lead time on public construction awards virtually assures another weak year ahead for this category. Adding up private and public construction suggests a modest single-digit increase in total construction spending in 2013, following what is likely a 3-to-9 percent rise this year. The back-to-back increases should produce a gain in construction employment of 100,000 to 200,000 over the next 12 months. That will be a welcome break from the past several years but will still leave employment about two million below the peak set in 2006. For more information, please contact Ken Simonson at simonsonk@agc.org.