1. Mixed Signals in Construction with Promises of “Much to Come”
The latest data for construction spending showed that volumes were cooling in both residential and nonresidential sectors. Residential construction was down 6% Y/Y on $895B in annualized spending through June while nonresidential fared much better but was still down a modest 0.5% Y/Y on $1.2 trillion in spending. These rates are still historically high, total construction spending is still 20% higher than it was in 2019. But the rate of growth is slowing.
Firms are watching three factors closely to gauge what future construction growth rates will be, and whether they will exceed the annual growth rate of 4% over the past 5 years. First, many projects started in 2021 and 2022 in the wake of the global supply chain crisis are maturing and those facilities are being put into service. That increases US manufacturing activity but slows construction spending. That lull is what is beginning to affect current data in the nonresidential sector. Residential activity is still being hampered by higher interest rates and lack of affordability for many consumers.
Second, a wave of new spending was reportedly created during trade negotiations this year. The percentage of this activity that actually shows up as real investment in projects is still in question, but the ‘promises’ are enormous. More than $5 trillion in “committed” spending could hit the US over the next 5 years if investors follow through on their ‘promises’ (the Trump Administration believes that this figure is closer to $8 trillion). Most of this is earmarked for the US energy sector, industrial manufacturing, and high tech facilities (datacenters, microchip manufacturing, etc.).
Lastly, trade policy is creating tariff pressures in some industries that will be difficult to overcome without reshoring production. In addition, there are many provisions in the newly announced trade deals that are designed to boost demand for US exports (agriculture, automotive, defense, and high tech). This will also drive new demand for projects in these sectors, and many will carry a sense of urgency to get those projects completed. Some incentives included in the latest tax bill could also speed up project starts.
In the meantime, architectural firms are reporting only a slight increase in foot traffic, but actual architectural billings are still sluggish compared to the past three years. This suggests that projects are still not yet shovel-ready and the coming spurt of growth in construction driven by these three factors may still be several quarters away.
Additional Reading: Construction Spending
2. Are Looming Labor Shortages About to Become a Crisis?
The construction industry has struggled to find enough workers to meet demand in normal years, but a combination of factors could make the scramble for attracting, hiring, and retaining workers much more difficult over the next 5 years. The industry currently has 246,000 jobs open which is lower than the prior four years (largely due to the slowdown in the residential construction market), but they remain nearly 140,000 higher than the average in the decade prior to the pandemic. And this is expected to get worse.
Deportations of migrant workers continue (whether voluntary or by force) and some construction firms are reporting loss of workers and higher levels of absenteeism. Some anecdotes across multiple subcontractors’ report that rumors of ICE (US Immigration and Customs Enforcement) agents being “in the area” can lead to entire work crews calling in sick on a given day – sometimes lasting for multiple days. They affectionately call this the ‘recurring COVID pandemic’ since many workers use COVID infections as an excuse to avoid work and potential deportation. Estimates vary regarding how widespread this is, but it delays projects and risks higher labor costs to find replacements.
Aside from this, demographic trends are also creating a problem. Estimates suggest that more than 22 million Baby Boomer Generation workers will reach retirement age by 2030. Some will opt to leave the market, and some will stay beyond retirement age. But the economy will have to adjust to a rapidly growing pace of Boomer Generation worker loss – and many in the construction sector are reaching that age. Some estimates suggest that the construction sector has 1.75 million Baby Boomers still working (about 18% of the construction workforce) and all of them will hit retirement age in the next 5 years. New entrants into the broader US workforce will only total 2.3 over this same period and AI worker replacements will only net 3 million. This leaves a workforce that could lose more than 15 million workers as a result.
The latest construction wage data shows the employment cost index for construction wages growing at a 3.5% annual rate. If nonresidential construction grows at expected rates and residential construction activity improves, wage costs will rise against this wave of labor shortages. Many efforts are underway to get young people into the ‘trades’ instead of going to college, but it will take time to see how this effort will pay off.
