Recovery under construction?

Published on
November 9, 2022
October 28, 2022

Work in progress

America’s construction world seems to be recovering steadily after the firm slap in the face by COVID-19. The rate of construction unemployment returned to its 2019 level of 3.5%, after having reached 8.9% mid pandemic. However, not the entire country is seeing an improvement in unemployment rates: 18 States have seen a decrease in construction employment. New York is all the way at the bottom, with a decrease of 8.9% since February 2020, followed by North Dakota (-6.4), Hawaii (-5.8), Kentucky (-5.5) and New Jersey (-5.4). On the bright side: 31 States have recovered well from the pandemic lows. Utah has increased 14.1% in construction employment since February 2020. Idaho (12.9), Tennessee (12.0), South Dakota (10.8) and New Hampshire (9.8) complete the top 5.

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Idaho and Utah also showed the biggest growth in population, 2.9 and 1.7%, while the population in New York decreased with 1.6%.

More and more jobs are available. Job openings rose from 237,000 in 2020 to 322,000 in 2021 and another 2,5% to 330,000 in 2022. Remarkable is that new hires on the other side keep going down. In June 2022 412,000 people have been hired which is a 2,8% decrease since June 2021 and a 31% decrease since June 2020. Finding enough workers will probably continue to be challenging for the long-term outlook...

The pandemic and reevaluated career options as a consequence of the lifted economy are some of the reasons for the shortage in construction laborers. Baby Boomers nearing their retirement and new workers starting at later ages. Where laborers used to start working in construction at the age of 16 to 20, we see now that workers enter the field between 25 and 30 years old. On the other hand, more and more construction workers are needed. Not only for new construction, but also for home improvements on all the houses that were recently bought and the houses that were built in the 40s and 50s will be in need for renovations soon. 3

If the price is right

For more than 18 months since September 2020 the bid prices were increasing at a much lower rate than the costs for new non-residential construction. Since March this year we have seen a correction in this area, but contractors are still being squeezed in costs. When we look at the history, a situation like this can easily last two years. Contractors were under a lot of financial pressure between Dec 2009 and Jan 2012 (26 months) and the same goes for Oct 2016- Nov 2018 (25 months).

Material costs are getting more expensive every month. Apart from the “normal” inflation, supply chain issues are pressuring the costs of a lot of goods. Especially prices of steel mill products are surging rapidly. One of the factors that is contributing to the high costs and supply issues, is of course the geopolitical situation. But there is more than that. For example, production and transport in China and Europe were being pressured in summer by extreme heat and drought, which have forced power cuts and limited freight over sea because of the low rivers. Within the US itself there are also logistic issues: importers who are trying to seek relief from backups at West Coast gateways are now causing new congestions at the East Coast and Gulf Coast ports...

The growing demand for construction goods on one side and lengthening lead times on the other side, caused many firms to stall their orders with suppliers to maintain their inventory. The industry began to reduce its order levels, while dollar levels continue to increase. The latest inventory reading at $84 billion in today’s dollars is 12% above the pre-COVID-19 high, but when we do our calculations with the worth of the dollar in 2019, reduces the current inventory reading to just over $60 billion and thus below pre-COVID-19 levels. In other words: The physical inventory is 20% below pre-pandemic levels, the current price for that reduced level of inventory is 12% higher. 4

In demand

How is the near future looking for construction?

The Architecture Billings Index, a leading economic indicator of demand for non-residential construction activity shows a lower value than last year. (53.3 in August 2022 vs. 57.7 a year ago. Any score above 50 indicates an increase in firm billings in comparison to last month. The ABI has been above 50 since February 2021, which is good news for architects after being in a decrease for an entire year. The lowest score we’ve seen was 29,5 in April 2020.

The strong billing score is encouraging. However, we see some flat scores in various regions and specific sector, indicating a nationwide deceleration in the next months. Since design activity is still increasing at the moment, it is expected to take another 9-12 months before construction gets negatively affected.

However, the Dodge momentum index, a 12-month leading indicator of non-residential construction spending, shows a 14-year high in June (173,6) In that month, the commercial component of the Momentum Index rose 4.1%, while the institutional component fell 6.2%. The rise in commercial was due to an increase in warehouse projects. For institutional buildings only healthcare increase. Year-over-year the index was 9% higher than in June 2021. The commercial component was 11% higher, and the institutional component was 5% higher than one year ago.

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27 projects with a value of at least $100 million US Dollars entered the planning in June. The high Dodge momentum index shows that developers still have hope in projects moving forward despite economic concerns. 2

Then there is the Multifamily Production Index (MPI), a weighted average of three key elements of the multifamily housing market: construction of low-rent units, market-rate rental unit and for-sale units. This index decreased 6 points in comparison to the previous quarter, mostly dragged down by the “for- sale units” which fell 11 points. The total MPI now lays on a score of 42 which indicates a weaker prospective.

The number of authorized multifamily units that have not yet started raised from 100.000 to 147.000 and while an increased backlog of unused permits frequently indicates a rise in the near future, it may not be as certain in this case. The fast rises in costs on both the buying as constructing side, could be enough reason for cancelation of projects.

Tech helps

Construction tech can help on the price side of things and also solve parts of the skills shortage. Modern and easy manageable machines are meant to pull the younger workforce towards construction.

To give the construction sector a boost, investors are backing startups bringing robotics, data management, automation and augmented reality into the construction process. With the industry representing about 6.3% of the U.S. GDP, the market opportunity is huge, with the rising spending.

Not only investor but the U.S. government helps boosting innovation in this crucial sector, too. Its recently enacted a $1.2 trillion Infrastructure Investment, with $100 million for digital construction technologies.


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1 https://inside.lighting/lighting-industry-market-info/architecture-billings-index

2 https://www.businesswire.com/news/home/20220711005151/en/Dodge-Momentum-Index-Hits-14-Year-High-With-Slight-Gain-in-June

3 https://www.forbes.com/sites/jennifercastenson/2022/08/20/expert-strategies-to-adapt-to-construction-labor-shortage/?sh=6a5a964c60b2

4 https://www.constructconnect.com/construction-economic-news/construction-industry-still-facing-supply-chain-challenges

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