This is a guest contribution from Ed Zarenski, the voice behind Construction Analytics – Economics Behind the Headlines. Zarenski semi-retired in 2014 from a 42-year career in construction, during which he spent over 30 years at Gilbane filling the role of Estimating Executive and publishing industry economic analysis.
Take a look at any construction industry publication, and you’ll see an article or two discussing the labor shortage. Often, these articles compare construction job growth to percent growth in construction spending. For more than five years, the industry has been saying it’s difficult to find skilled workers to fill those jobs.
From 2014 to 2018, construction jobs increased by 1.43 million — representing nearly 25% growth. This is the 2nd strongest 5-year job growth on record. Spending increased by 45% during this period. Only three times since 1970 have 5-year job totals increased by more than the most recent 5-year period, 2014 to 2018.
However, looking at job growth relative to spending growth is the wrong comparison. To get a more accurate picture, jobs must be compared to volume, or spending (revenue) minus inflation. Here’s why it matters, how it relates to the possibility of a downward correction in construction jobs, and why a clear understanding of it all is necessary to plan successfully for the years to come.
Spending vs. Volume
Spending is measured in dollar value, always current to the year, which includes inflation from year to year. Volume is reported in constant dollar value, constant to the baseline year, which adjusts for inflation. In reality, jobs should be compared to volume, which reflects constant dollar value volume growth.
If spending or revenue for a company increases by 6% a year and inflation increases by 4% a year, then real construction business volume is increasing by only 2% a year. Balanced job growth would then increase by 2% a year. If you hire support staff to support a 6% growth in revenue, you would be grossly overstaffed.
Volume measures the amount of work completed, not the cost of the work completed. In this brief analysis, I will compare the number of jobs added to the volume of work added. Adjusting for inflation removes the variable of inflated cost.
Jobs vs. Volume
From 2000 to 2006, construction spending increased by 45%, but volume barely moved at all. Almost all of the increase in spending was inflation. During this period, jobs increased by about 15%. Businesses watched as spending increased by 45% in seven years. They increased staff by what appeared to be a conservative 15%, but real volume was flat. Heading into the recession, construction revenue on the books had been increasing for years, but volume growth was flat, and companies arrived in 2007 top-heavy with jobs.
Construction spending from 2011 to 2018 increased by 67%, while volume increased by only 32%. All of the rest of the revenue growth was inflation.
If you are tracking business performance by current revenue growth and leaving out inflation, you need to reassess your plan.
What Influences Job Growth
Similar to a pattern that occurred in the pre-recession spending boom, job growth may be influenced by revenue growth rather than volume growth.
Let’s go back to our most recent 5-year period, 2014 to 2018. As I mentioned, construction jobs increased by 1.43 million during this period, nearly 25% growth. Spending increased by 45%, but after factoring for inflation, volume increased only 20%.
For the last two years, the total of all construction spending (revenue) increased by 10%. But volume after adjusting for inflation increased less than 1%, and total jobs are up almost 8%. Overall, for the last two years, construction job growth far outpaced construction volume growth.
Current Job Growth
In 2017, construction spending increased by 4.5%, but inflation was 4.4%. Real construction volume increased by only 0.1%. Construction jobs increased by 3.4%.
In 2018, with 4.8% inflation and only 5% spending growth, real construction volume increased only 0.2%. Construction jobs increased by 4%.
For 2019, considering 4.5% construction inflation with spending predicted up only 2%, volume will be down 2.5% from last year. Jobs through April are up 1.2%.
Revenue growth looks like 5% a year, but it’s all (or nearly all) inflation. We’ve grown top-heavy jobs by 10% in less than three years. The last two years look remarkably similar to 2005 to 2007 when jobs were still increasing rapidly, but residential construction was already well into a downturn.
Construction jobs — now over 7.4 million — have been over 7.3 million since summer 2018. The last time jobs were over 7.3 million was mid-2005 through early 2008, at which point the recession abruptly caused the loss of over 700,000 jobs within 10 months and more than two million jobs over the next three years. Jobs are now only 5% lower than the previous high of 7.7 million in 2006 to 2007. But construction volume is still 15% below the peak constant revenue volume reached in early 2006. The current situation of job growth rate exceeding volume growth is worse than it was leading into the last recession.
Through May, only 26,000 jobs have been added in the last four months. That’s the slowest job growth for any four months since 2012. January posted 56,000 new jobs, but Nov-Dec-Jan averaged only 25,000 jobs/month. In 2018, jobs increased by an average 26,000/month.
What Lies Ahead?
From Jan 2017 to April 2019, job growth exceeded construction volume by 10%. The last four months is the slowest four months of job growth in seven years. Is this the beginning of a job slowdown?
It’s difficult to square job growth consistently in excess of volume growth with the long ongoing narrative of job shortages. It could be argued that it is a “skilled” job shortage, a lack of workers with the needed experience. We would have to look back to the period 2000 to 2004 to find a time when job growth was balanced with volume growth.
Should we expect greater job losses on the horizon? The last two years look remarkably similar to 2005 to 2007, when jobs were still increasing rapidly but already residential construction was well into a downturn. We are now well into the third year of job growth significantly exceeding growth in work volume. Unsupported job growth will eventually lead to downward correction in construction jobs. The only question is… when?
Ed Zarenski’s blog, “Construction Analytics – Economics Behind the Headlines,” can be found at https://edzarenski.com.