Construction and the economy
INSIGHT ARTICLE |
When are the problems confronting the construction industry going to end? While some sectors of the economy are improving, construction is not keeping pace, especially in the job market. In the May 2011 job market report, U.S. employment added approximately 54,000 jobs, including 2,000 in construction. However, since February 2010, the construction industry has lost 4,000 jobs while 1.8 million jobs have been added throughout the country.
In construction, even the positive signs have hidden implications, especially when it comes to employment. The construction unemployment rate dropped to 16.3 percent in May 2010 from 22 percent one year earlier. However, Ken Simmons, chief economist for the Associated General Contractors of America has stated that the decline is primarily due to the fact that many construction workers have either stopped looking for work or have found employment in other industries. In June 2011, the U.S. Department of Labor stated that the construction job market was essentially unchanged from May 2011.
The continuing high unemployment in construction is largely attributable to the low number of new housing starts. Many economists have stated that the economy will not turn around until the housing industry rebounds. At the Allen and Company conference in Sun Valley, Idaho last month, Warren Buffet echoed that sentiment, saying "We will come back big-time on employment when residential construction comes back." While Buffet did say when residential construction would improve, he thought it would be reasonably soon.
In some non-housing sectors, construction is improving, especially in healthcare, higher education and utilities. In the utilities sector, construction performance has been particularly strong for renewable or sustainable energy projects. However, public construction, which benefited from the stimulus money, is winding down and could be further affected by strained state and local budgets. Therefore, most capital improvement programs are being limited to repairs and maintenance or the remodeling of existing facilities – few new building projects are being started.
Ongoing sluggish economic performance in the construction industry is not just putting employees out of work – it is also putting employers out of business. As with the broader economy, where larger companies have been able to survive while some small companies have not been as fortunate, in construction, many small specialty contractors and trades have had to shut their doors.
While some believe the economy will begin to turn around at the end of the year, there are others who are concerned that handling of the recent debt limit deal will affect growth, pushing them to reduce their estimates for the remainder of the 2011. Specifically, Capital Economics, which had expected the economy to grow at 2.5 percent, is now predicting 2 percent growth as more likely. The economy must grow at 2.5 percent annually to keep the unemployment rate from rising.
I recently attended a chief financial officer's forum on emerging trends and issues where I listened to many speakers and roundtables discuss the current economy and real estate market. The general consensus was that we probably will not notice significant improvement in the economy and the construction industry this year. Many at the conference felt that consumers' confidence had been shaken by the handling of the recent debt limit deal in Washington. In addition, some felt that we are in a "debt driven" recession, which historically lasts five to seven years. According to the speakers at the conference, we are in year two of this recession, which leaves another three to five years of difficult economic conditions to navigate. Whatever the time period, it appears the construction industry may be one of the last to rebound.