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Construction Health Update: America’s Construction is Strong at 83


As of Monday, January 30 our national Construction Health Indicator score is 83.4.

In 2016, the U.S. economy expanded 1.6 percent. Since the recession, the construction industry’s progress has been phenomenal. Now, under a new Presidential Administration America has set its’ sights on a goal of 4 percent growth. In order to succeed, construction will have to overcome significant challenges, like a working age labor force that is shrinking as Baby Boomers retire, sluggish productivity growth, and rising materials prices.  

Homebuilder Confidence Slips While Warehouse Construction Charges Forward

After last week’s release of the National Association of Home Builders/Wells Fargo builder sentiment index score of 67, we discussed the decline in homebuilder’s confidence about future sales prospects. Now, we have evidence to corroborate their fears. 

According to the Commerce Department, new-home sales fell 10.4 percent last month to a seasonally adjusted annual rate of 536,000. Overall, 2016 sales saw a 12.2 percent improvement from the previous year. But, this tail-end decline is looking like it will be a trend  that homebuilders should keep an eye on moving forward.

Most of the sales growth during 2016 came from low mortgage rates and a steadily improving job market. Now, momentum is tapering as mortgage rates have risen since the November presidential election, worsening affordability and potentially curbing sales growth as more buyers cope with affordability issues.

As a result, the industry will depend on commercial and office construction to pick up the slack. Alex Carrick, chief economist for ConstructConnect, said he expects an 11.3 percent uptick in private office construction starts in 2017, or $20.5 billion. Job growth in professional business services are driving much of the need for this additional office space. 

Job and income growth in the United States has contributed to a boost in consumers shopping online. Because of this e-commerce success, there is a rising demand for new warehouse space to house their distribution operations. Currently, less than five percent of total warehouse capacity is available for leasing, according to CBRE Group Inc. This is why we are seeing a boom of construction in this segment. 

California’s Inland Empire is leading the nation in industrial construction, the majority of which is due to warehouses and distribution centers. According to JLL’s fourth quarter reports, in 2016 this region produced 24,351,529 square feet of warehouse space.

Here’s What You Can Do Right Now About the Industry’s Greatest Challenge… Labor 

In December, 7.4 percent of construction workers were unemployed. This is a 29.8 percent increase from the previous month. 

Meanwhile, according to the U.S. Bureau of Labor Statistics, construction job openings stand at a 10-year high. As a result, over 80 percent of Associated Builders and Contractors (ABC) members report having difficulty finding appropriately skilled labor. 

This labor shortage has burdened business owners with shrinking profits as well as home buyers and renters with rising labor prices. Currently, we are facing the highest ever value of hourly construction wages, topping off at $28.42 in December. This is a 0.4 percent increase from the previous month, and the highest wage on record.  

In the next 10 years, we can expect projects to continue demanding more labor than will be available. As a result, labor supply constraints are not only likely to lower overall industry economic growth, but they will put further pressure on corporate profits.

If you begin to focus more on raising the efficiency of your existing workforce rather than just hiring more non-existent workers to meet demand, we’ll be better prepared to handle our challenges. 

According to the labor department, overall American productivity increased in the third quarter at a 3.1 percent rate. The revised estimates for productivity and output followed the government's revisions to the gross domestic product, the economy's total output of goods and services, last week. The revision boosted GDP growth in the third quarter to 3.2 percent, up from an initial estimate of 2.9 percent.

Materials Prices Are Rising. Are they Squeezing Your Profits?

Recent analysis of U.S. Bureau of Labor Statistics data released by the Associated Builders and Contractors show that input prices rose 0.4% in the month of December. This is up 2.1% year-over-year, the largest 12-month increase in 30 months.

Deals made by OPEC and non-OPEC members to suppress oil production have resulted in crude petroleum prices rising 18.9% for the month of January. Along with it, unprocessed energy materials rose 14.6% – meaning the cost of processing and shipping materials has increased.

Anirban Basu, Procore’s Chief Economist says, “Other factors have also led to a steady rise in materials prices, including an improving global economy,” said Basu. “While not accelerating dramatically, global economic growth in 2017 is expected to exceed 2016’s performance, with nations like Brazil and Russia no longer mired in deep recessions. U.S. economic growth is also expected to be stronger in 2017, lifting the overall global economic outlook and supporting more bullish commodity markets.”

“It is probably too early for contractors to become excessively preoccupied with rising materials prices,” said Basu. “Despite recent signs of economic improvement, massive levels of debt and commercial vacancy in much of the world will constrain both worldwide economic growth and global construction.”

That’s all we have for now. Keep building and we’ll keep crunching the numbers. Check back here daily as numbers refresh and we’ll continue to translate this into meaningful digests that will help you make informed decisions all week long.

Click here for recaps from Construction Health Updates from past weeks.

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