The Economy of the Construction Industry: Construction is the Canary in the Coalmine
Just when we thought our industry was climbing out of the woods, construction spending forecasts have begun to reflect the national mood and the retraction of the economy and broader markets. The mood is anxious and uncertain. Unemployment in the construction industry is still double the national average and discouraged trades people have begun leaving the industry. We are not gasping for oxygen as we were in 2010, but supply levels of the tanks that provide air to our industry are worrisome. Our oxygen is job growth in the industries that demand our services.
When private sector jobs grow, new employees need offices, buildings and equipment. This has a ripple effect. When a dollar is invested in construction by the private or public sector, there is a rapid multiplication of employment that follows. Construction as a service provides homes for families, infrastructure for daily living, places of culture, institutions of learning, and centers of employment. Most of all, it provides jobs.
According to Associated General Contractors Chief Economist Ken Simpson, for every billion dollars spent on non-residential construction, 28,500 jobs are created. These jobs are on the jobsites (33% of the jobs), at material suppliers, equipment dealers and manufacturers (17% of the jobs), and in places where construction workers spend their wages like the lunch wagons (50% of the jobs). Therefore, spending on construction through private sector growth can have a profound effect on our economy and serves as a serious indicator of our economic health. Construction can contribute to 5% to 10% of the US GDP and is one of the last industries to signal a recession and one of the last to signal recovery. Therefore improvements in the industry would indicate months of prior recovery by other industries and decline would reflect the mounting problems.
Yes, construction is a veritable canary in the coalmine.
The reports for 2012-13 are mixed. First, it appears as if spending on residential and non-residential construction services bottomed out in 2010 and began to rebound in 2011 into 2012. In New Castle County, permitted square footage for non-residential building has already eclipsed 2011 levels by 20% and residential permits are up 30%. The May Census Bureau data demonstrates that there is a 7% year over year increase in construction for all sectors. The Turner Cost Index corroborates this evidence by suggesting a .95% increase in construction costs for the first half of the year, nearly double 2011 (but a far cry from 10.6% annual increase in 2006). Both the County data, National Census Bureau data and the Turner Index are showing positive signs for the demand for construction services. But beware, this data is in retrospective and construction is the lagging canary.
Leading indicators are bleak. Job reports in May and June for industries that demand the services of construction companies signaled sharp declines in expansion. These jobs are an essential element in the survival and growth of the construction sector. More troubling is that a leading indicator for the industry, the Architectural Billings Index hit a five month low. This index tracks new contracts for architects, an excellent indicator of future work for the construction industry. The June report is an index of 45.8. An index above 50 indicates growth of billings. Below 50 indicates attrition. This is a disappointing result because our region was beginning to trend upwards and the national rate crept to 51 from October to March.
We seem to be bumping along the bottom.
Spending for the industry peaked nationally in 2006 at $1.17 trillion and has declined to $821 billion. And Delaware has not escaped the wrath. According the Association of General Contractors, Delaware’s non-residential construction employment dropped 4.9% in the first quarter of 2012, ranking Delaware 46th out of 51 states plus Puerto Rico. This is a 35% decline from our peak in 2005. Wilmington ranks 222 out of 337 metropolitan areas.
Our community clearly needs to work together to achieve net job growth in every industry and to support every effort our governor and legislators make to accomplish such. We also need to call into question distractions from this effort, and postpone any new non urgent proposal in the legislature that doesn’t have something to do with jobs, jobs, jobs. Environmental policy should be about jobs. Education should be about jobs. Land use and land conservation efforts should be about jobs. If we can attract employers and they can ultimately trigger an investment in the construction industry, we will all benefit by the multiplier.