Q2 Construction Update: Market Growth Amid Labor Data Volatility

June 8, 2024

1. Construction Markets Showing Growth in 2024 

There are several construction sectors that continue to be strong in 2024 and the outlook for those sectors shows good growth for the rest of the year and likely will go well into 2025. These outlooks are based on recent trends and government funding expectations.  

  • Industrial/Manufacturing: Part of the strength in the nonresidential sector has been in manufacturing construction activity.  Construction spending has been 4-times the normal volume at more than $223 billion a year (up 25% year-over-year). This is expected to continue through the next year and well into 2025. With reshoring and nearshoring trends still active, estimates suggest that this sector could still be waiting for $3 trillion in annual manufacturing activity to be relocated to the US/USMCA markets.  

  • Infrastructure: Government spending under the Infrastructure Bill and Inflation Reduction Act will still be injected into the construction sector in 2024 and 2025. Estimates suggest that between $50B and $70B in additional spending will be injected into the US construction sector over the next three years as a result of these two acts alone. For infrastructure, public safety spending is up 46% Y/Y, highway and street construction is up 20%, water supply is growing at a 17% rate, power system construction is up 12.8% and sewage and waste disposal is up 10.6%.  Combined, those sectors are currently running at more than $375 billion in annual construction spending. 

  • Data Center Construction: The US still needs more than 24,000 small and medium sized data centers to handle end-of-line computing demand as AI and other streaming/computer activity accelerates. 

  • Transportation: Although the transportation sector has been in contraction over the past 24 months, changing distribution patterns are going to force investment and spending on freight handling capacity. Inbound container activity into the US is currently forecasted to exceed 2 million containers per month over the next six months (which would rival historical highs for continuous inbound volumes). Transportation construction spending is currently trending 6% higher than the same period in 2023. 

When adjusted for inflation, other segments of construction are flat or declining.  Health care, office, communication, commercial, lodging, and conservation are struggling to find new projects and spending is not keeping pace with 2023 volumes.   

Health care construction activity is surprisingly weaker than expected. Some of this is a function of profit margin pressures in the post-pandemic era.  Demand is high, the sector needs to engage in significant improvements and modifications to operating conditions so that the next pandemic does not shut down profitable operations. Ancillary operations (those away from primary hospital operations) are critical profit-producing areas for hospital systems, and construction activity in those areas is possible in 2024 if funding can be put in place.       

Source:  Armada Corporate Intelligence; Industry earnings reports   

2.  Construction Labor and Materials Data Sending Mixed Signals 

The latest Federal data for construction operating conditions shows two divergent patterns in key datapoints. Namely, data on labor conditions shows something very different from materials prices. Some anomalies in Federal data could explain some of the differences between the two, labor data is showing volatility and data revisions are common.  

A graph of construction jobs

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Construction job openings experienced their most dramatic month-over-month change arguably in history. The number of openings in the industry has plummeted from 456,000 in February to 274,000 in March (latest available). That drop of 182,000 is the sharpest in history, down 39.9% month-over-month and 5.8% lower year-over-year.  

Again, revisions in the next report could adjust that reading and conditions may not have changed that dramatically. But a few observations are important.  

First, job openings are still nearly 100,000 higher than they were throughout most of the decade between the Great Recession and the Pandemic. But secondly, if this reading is true and correct, it would signal that conditions in the sector are changing rapidly. It would be unusual for this many workers to suddenly enter into an industry (to pull job openings down), this is more likely firms pulling open positions off of their labor postings. 

A graph showing a price of production

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On the other hand, there has been no easing in material costs for the sector. If there is any pullback in demand, it is not showing up in the price index for construction materials. Producer Prices for construction materials are still running near all-time highs and well above the long-term trend. This is keeping construction costs higher, and likely is keeping some new project starts from occurring. 

As mentioned in other reports, transportation costs are higher, some raw material input costs (like copper) are higher, and labor costs are obviously still elevated from historical perspectives. This is what is helping keep prices elevated overall. In addition, shortages of electrical products (commercial transformers, electrical panels, etc.) are keeping prices elevated.  

As is important when data discrepancies like this occur, another month or two of data releases to confirm the trends in employment are important. If this trend is confirmed, it might suggest some weakening in some pockets of construction activity.

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