Jobs report understates nonresidential construction's vigor
Housing even weaker than total shows, AGC economist Simonson asserts

Today’s employment report shows nonresidential construction is still boosting the economy, despite the homebuilding meltdown,” Ken Simonson, chief economist for The Associated General Contractors of America (AGC), said recently. Simonson was commenting on the October 5 payroll employment report from the Bureau of Labor Statistics (BLS). “In fact, nonresidential construction is far stronger than first inspection of the data reveals.

“Seasonally adjusted total construction employment fell 14,000 in September and was down 112,000 or 1.5 percent compared to September 2006,” Simonson remarked. “But that masks divergent trends in nonresidential and residential construction.

“The BLS numbers show that over the past 12 months, employment in the three nonresidential categories—nonresidential building, specialty trades, plus heavy and civil engineering—climbed 42,000 or 1 percent,” Simonson says. “Meanwhile, residential building and specialty trades employment supposedly shed 154,000 jobs or 4.5 percent.

“That gap, while large, vastly understates the actual difference,” says Simonson. “Census Bureau figures for August show residential construction spending was down 16 percent from a year before and nonresidential was up almost 15 percent. With all signs pointing to still less homebuilding ahead, it’s likely that residential employment is also down roughly 16 percent. That means about 400,000 ‘residential’ specialty trade contractors are now doing nonresidential electrical, plumbing and other work.

“A proper classification of these workers would show nonresidential construction has actually added more than 10 percent to its payrolls, outpacing nearly every other industry,” Simonson noted. “Moreover, the BLS report shows there is more growth ahead. Architectural and engineering employment rose 3.0 percent in the past 12 months. Their output will turn into construction jobs in the next several months.

“In the year ahead, I expect some pullback in office, retail and hotel construction, but more growth in energy, power and hospital work,” Simonson concluded. “Highway construction is also vulnerable unless Congress and the states add more revenue to fund highway programs. And accelerating costs of labor and materials will again be tough for contractors, private owners and public agencies doing construction.”

back to top

************************************************************

Materials cost calm ending soon?
The Associated General Contractors of America (AGC) today released its fifth Construction Inflation Alert, warning owners, budget setters and contractors to expect larger materials and labor cost increases in 2008 than they have experienced in the past 12 months.

"Nonresidential construction has had a banner year so far in 2007 and we've seen spending on nearly every segment increase compared to 2006, despite the plunge in homebuilding," said AGC Chief Economist Kenneth Simonson. "The materials cost surges that plagued the industry in 2004-2006 have slowed dramatically, and labor remains available in most markets.

Simonson warned that many observers expect that the end of the calm is coming soon, "The worsening slide in homebuilding and turmoil in the credit markets threaten some types of nonresidential construction. At the same time, some materials costs are beginning to turn up again, and labor costs have started to accelerate."

The cumulative increase in the producer price index (PPI) for construction inputs since December 2003 (28 percent through August 2007) remains more than double the 13 percent increase in the most common measure of overall inflation, the consumer price index (CPI) for all urban consumers. Labor costs, in contrast, have risen at similar rates for construction and for the private sector as a whole.

The cumulative difference matters because the estimates for many projects now being bid, especially public facilities, were prepared in 2003-2005 under the assumption that construction costs would escalate at the same rate as the CPI. That divergence explains why some projects are being canceled, delayed or redesigned.

"The housing meltdown and the more recent credit market turmoil do have some spillover effects on nonresidential construction," noted Simonson. "Retail, suburban office and local government construction are especially affected by the drop in homebuilding, home sales, and property values, respectively. Tighter lending standards and financial-firm layoffs will trim construction of offices and other income-producing properties, such as hotels and warehouses."

Meanwhile, the nonresidential industry has benefited from greater availability of specialty trade workers who have lately shifted from residential work. Simonson added, "But wages have begun rising more steeply for specialty trade contractors, suggesting that the number of workers suitable to switch is close to exhaustion. In the next several months, the rate of wage increases is likely to reach 5-5.5 percent, up from a recent 4.5 percent gain."

Labor costs are likely to accelerate further as well if residential building begins to draw back specialty trade contractors in late 2008. "Construction wages could go up 5-6 percent annually for several years beginning in late 2008," suggested Simonson.

For the first time, the Construction Inflation Alert shows the cumulative price change since December 2003 and trends in construction wages. The report also offers a sampling of comments on credit market turmoil and examines the trends in construction activity, materials and labor costs over the past several years.

To download a copy of the Construction Inflation Alert, visit http://www.agc.org/Oct2007CIA.

back to top

************************************************************