Category Archives: National Economy

Construction Job Openings Hit a High

One of the bits of economic data that gets less mainstream media attention is a survey call the Job Openings and Labor Turnover Survey (JOLTS). The JOLTS measures how many openings there are and why, creating a “quit” rate that measures what percentage of turnover is due to workers quitting their job. The correlation between a higher quit rate and a good economy is very strong. The quite rate is high right now, a condition that is exaggerated by the shrinking workforce demographics. In the construction industry it’s a perfect storm of higher demand for construction and fewer workers.

The AGC’s chief economist, Ken Simonson, commented on the release of the JOLTS data last Friday. Here are Ken’s comments:

Job openings in construction at the end of July totaled 373,000, an increase of 59,000 (19%) from the July 2018 total and the highest July total in the 19-year history of the series. This was the 14th consecutive month of record job openings for a given month. (The data are not seasonally adjusted. Because hiring and openings in construction vary considerably from month to month, comparing openings across months is not meaningful.)

The industry hired 442,000 employees in July, 8,000 (2%) fewer than the number hired in July 2018 but the second-highest July total since July 2008. While the dip in hiring may be an early sign of cooling demand, it may also be an indication that employers could not find enough suitable candidates—which is consistent with the jump in openings at the end of the month. Combined filled and unfilled positions (hires + openings) in July were a record for the month.

There were 167,000 layoffs and discharges in July, and increase of 29,000 (21%) from July 2018 but roughly in the middle of the range of July layoffs over the past seven years. Layoffs have exceeded or matched year-ago levels for nine consecutive months, a possible indication of a slowing market—or of the industry hiring more workers without acceptable skills. The rate of layoffs (layoffs as a % of employees) has remained near the low end of each month’s range over the past seven years, suggesting there is no strong trend toward cooling demand for construction.

The quit rate in July was 2.8 per 100 employees, slightly less than the July 2018 rate (3.1) but still the second-highest rate since 2008. This suggests employees are finding opportunities elsewhere. The data do not show if they quit for other construction jobs, jobs in other industries, or are leaving the workforce. But a high quit rate is indirect evidence of continuing opportunities for employment in construction.

In sum, I think the data are consistent with a continuing strong construction market and with the results of the 2019 Autodesk-AGC of America Workforce Survey, which found that 91% of the 1,935 respondents expect their firms will hire hourly craft personnel in the next 12 months (19% for expansion, 72% for replacement). That result was very similar to the 2018 survey and the January 2019 Sage-AGC Hiring and Business Outlook Survey.

Click here to see Ken’s slideshow on the construction market.

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Hiring Slows, Pittsburgh Construction Hums Along

This morning’s Employment Situation Summary for August showed that U.S. employers had added 130,000 workers to payrolls during the month, about what was expected. Unemployment remained at 3.7%. Observers are making headlines about the slowdown in hiring but it’s worth pointing out that a) the economists’ estimates of job growth are highly speculative and missing by 13% on a highly speculative estimate is hardly missing; and b) job growth that is still keeping pace with population growth at this stage of the economic cycle is solid growth.

Backing that last point up is the fact that the workforce is continuing to expand, even as unemployment remains unchanged. The number of workers grew by 30,000 in August, a sign that unemployed persons are continuing to come off the sidelines and find work. Also encouraging was the continued growth in wages, which topped $28/hour again for the second straight month.

The August report isn’t all sunshine, of course. The hiring paled in comparison to one year earlier, when 282,000 jobs were added. The lower number was also consistent with the 2019 trend, which is seeing an average of 158,000 jobs added monthly, compared to 170,000 in 2018 (and that after a 500,000 job downward revision to 2018). Moreover, the trend for the past six months is even slower, falling below 135,000 new jobs.

After the last two recessions, which were precipitated by catastrophic events, the U.S. economy seems to be on a course to slow down, rather than hit a wall. The current economic expansion started in March 2009. That’s a long time without a downturn. Trade wars are hurting U.S. corporations and farmers. Most of the rest of the G-20 nations are seeing flat economies, or even recessions, at the moment. It’s more likely than not that some of the jobs reports during the next six months will be even weaker than August’s. But maintaining the highest level of economic output in U.S. history isn’t the worst place to get stuck.

A look at the Builders Exchange his past week or so reveals that the bidding market is slowing but local project news reflects the healthy local economy. Franjo Construction started work on a $3-4 million expansion/renovation project at Innovative Carbide in North Huntingdon Township. Franjo also pulled a permit for a $3 million dispensary buildout for Solevo Wellness at the Streets at the Meadowlands in North Strabane. Massaro Corp. was awarded the $1.2 million WVUM Ruby Hospital radiology reading renovation. Waller Corp. started work on $5 million The Eagle Food & Beer Hall for Thunderdome Restaurant Group. Pitt is conducting final CM interviews with Massaro, Turner and Whiting-Turner for its $200 million central plant/Human Performance Center project. And the $200 million-plus, 600,000 square foot office tower proposed by JMC Holdings has gone back out for CM proposals. Last time, JMC worked with Turner, PJ Dick, Mascaro, and others, hiring Turner for preconstruction services.

Amazon At Last

July 30th brought the governor and a cast of dignitaries to Findlay Township to announce what had been whispered about for three years (see our July 2016 post), that Amazon was building a million-square-foot fulfillment center at Chapman Westport. Highwoods Construction will be bidding packages for the massive warehouse ASAP. Amazon’s commitment is just one of a number of large-scale industrial deals being done or pursued in Western PA. Komatsu is in the process of selecting a developer for its 250,000 square foot warehouse and office at Alta Vista Business Park in Washington County. Developers Suncap Properties and Al. Neyer have been competing.

The Federal Reserve Bank cut its Fed Funds rate .25% on July 31 at its Open Markets Committee meeting. The stock market plunged a bit after the announcement, likely in reaction to sentiment that the cut would be larger. Expect a rebound shortly. The Fed’s language suggests that another 25 basis point cut is likely later this year. For the U.S. economy, such stimulus is unnecessary at the moment, but economic data globally shows slowing and the bond markets have been trading at interest rates that are lower than the Fed Funds rate for longer maturity bonds. That’s what an inverted yield curve is and investors don’t like inverted yield curves. (You can read about the yield curve in the July/August BreakingGround.)

July’s building permits show that Hunter Buildings started work on a $6.5 million control room building for Eastman Chemical in Jefferson Hills. Rycon Construction pulled a permit for $2.2 million renovation of the AHN Wexford Medical Mall. Uhl Construction is working on a $1.6 million addition/renovation to Baierl Acura in Pine Township and $2.7 million project at Baierl Toyota in Mars, PA.

FMS Construction was awarded the $1.9 million restoration/conversion of the Lohr Building in Wilkinsburg. FMS is also doing general and mechanical/refrigeration construction on Giant Eagle’s $6 million Hempfield Square store renovation. Penn State selected PJ Dick for its $25 million Erie Hall replacement at the Behrend College. PJ Dick started work on the $17.5 million combined power/heating/cooling plant at the Wexford Medical Mall.

Keep An Eye on the Yield Curve

This is more than a bit wonky. As the U.S. economy hits a new record for economic expansion, the age of the business cycle is making people worry about the next recession. That’s not a bad thing. The longer expansion continues, the closer we are to the next recession. One of the indicators that is getting more airplay these days is the inverted yield curve. I don’t blame you if you can’t get too motivated to get to know this indicator but here’s the thing: an inverted yield curve has preceded the last three recessions and seven of the last eight.

We’re going to devote an article to the yield curve in the July/August BreakingGround but here’s the short-hand version until then.

The yield curve describes the difference between the interest rate on short-term and long-term government loans (or bonds). The long-term bonds should have higher rates because there’s a greater risk of something (like inflation) eating at the money you get repaid as time goes on. When the long-term rates are lower than short-term rates, the yield curve is negative or inverted. There’s a whole technical explanation in BreakingGround (and on the Internet) but the short version is that the yield curve inverts when lots of people are nervous about the economy and invest in long-term bonds with lower rates. The longer this situation lasts (see the red line below the white one below), the more likely that a recession will occur within 6 months to 2 years. It also makes it more likely that the Federal Reserve Bank will cut rates in July. That will make the economy happy, at least for a while.

 

 

 

 

 

 

 

 

PBX reports that March Westin has early bid packages out to bid on the $60 million Hodges Hall renovation at WVU.  The PBX also reports that Al. Neyer will start construction late summer on the $39 million first phase of its new office building at 21st & Smallman.Dick Building Co. was awarded the contract for the $2.7 million TI for Industrious at Liberty Centre. A. Martini & Co. will be doing $1.8 million renovations to PPG Wintergarden’s event space for Bottle Management (the company that developed City Works restaurant). Jendoco Construction has started on the new $5 million exhibit and office for Contemporary Craft in Lawrenceville. Shannon Construction was awarded the contract for the shell and core renovations at Station Square.

Good News on the Economy

The first week of the month is an eventful one for economic data. Last week was no exception. First the Commerce Department announced that total construction spending had declined year-over-year, but was still near all-time record high levels at $1.282 trillion dollars annually. The news that followed was rosier.

The Commerce Department released its first estimate of GDP growth for the January-March 2019 quarter. The 3.2% annualized jump was higher than expected. The above average growth was a turnabout from the talk of recession from earlier this year. There were two notes of caution in the report, however. First, GDP was inflated by an unusual buildup in inventories, which generally means that a following quarter will have lower growth from inventory depletion, There was also a temporary decline in imports, likely resulting from tariffs, which boosted consumption of U.S. goods. The second caution was the 1.3% increase in the sales of domestic goods to consumers and businesses. This suggests that underlying demand is lower than the headline GDP growth.

On May 3, the Bureau of Labor Statistics released its monthly Employment Situation Summary, which found 263,000 jobs had been created in April. Unemployment fell to 3.6%, with the number of unemployed persons falling to 5.8 million. That’s more than one million fewer people than there are jobs open, which underscores the seriousness of the problems that businesses are having with finding workers. In reality, this trend of roughly one million more jobs than workers has existed for a year or so, and it should have slowed the economy by now. Obviously, that hasn’t happened.

Light regional construction news. Research of April’s building permits in Pittsburgh revealed that Cavcon was selected to build Vollmer America’s new $4.8 million building in Findlay Township. PJ Dick has started work on the new $26 million multi-modal garage behind Bakery Square on Dahlem Place. A. Martini & Co. started demolition on the $6.5 million Wabtec TI at 30 Isabella Street on the North Shore.

An Interesting Warning Sign

This may be looking for the dark cloud in the silver lining, but there’s an interesting economic indicator that appears to be a warning about the economy. It’s called the “output gap” and it’s an indicator of how close the economy is to the full potential GDP output. In other words, how close are we to having no more capacity to grow, either because there are no more workers or no more capacity to make things. That’s a pretty accurate description of today’s conditions. The thing that makes this measure worth noting is that a recession has followed the peak of the output gap every business cycle for almost 50 years. The question is: how close are we to peak?

Pittsburgh BAC_2018_07

There is no reason that the economy has to go backwards just because it has when conditions were similar in the past. The most practical and urgent conclusion to draw from the current output gap is that the shortage of skilled workers and capacity could limit the ability of businesses to expand, even if their sales are growing. Adding a new plant or new equipment won’t help you grow if there is no one to occupy or operate it.

A few of the projects that have been in the news lately are either bidding or getting ready to bid. Packages are bidding and have been let by Forest City Enterprises for the $20 million conversion of the Freight House Shops to the UPMC training center. The $45 million Produce Terminal/1600 Smallman Street mixed-use development, being built by PJ Dick, is getting close to construction. Al. Neyer Inc. is preparing to start work on two new buildings, totaling 267,000 square feet at the Clinton Commerce Park in Findlay. There is a $6 million UPMC/Indiana Hospital joint venture cancer center out to bid to AIM, Landau, Massaro, MBM, Mosites, Shannon and Volpatt. New-Belle Construction has started work on a 67,000 square foot warehouse/office in the Technology Drive industrial park in New Stanton.

Construction Inflation Becomes a Problem

Prices for construction materials and products have been creeping up steadily for more than a year. Higher demand pushed supply lines to the limit of current capacity, giving manufacturers the opportunity to raise prices and regain some long-lost profits. Wages likewise have been creeping higher, outstripping the wage gains of the overall workforce. Creeping became “leaping” during the past two months. The first signs of sticker shock are beginning to appear.

All of the gradual price increases have been given a boost by the tariffs levied by the Trump Administration. While it’s worth noting that virtually all of the documented increases happened before the tariffs went into effect, the threat of tariffs gave manufacturers the room to push price increases into the market. That has applied to products that won’t be affected by the tariffs too. Surcharges were beginning to hit the market for tariff-affected items in June, and the impact on producer prices was immediate.

Analyzing the Department of Labor Statistics’ data for May, AGC Chief Economist Kenneth Simonson noted that “the producer price index jumped by 20.0 percent for aluminum mill shapes, 17.4 percent for copper and brass mill shapes and 12.3 percent for steel mill products between June 2017 and June 2018. Other construction inputs that rose sharply in price from May 2017 to May 2018 include diesel fuel, 52.8 percent; lumber and plywood, 18.3 percent; asphalt felts and coatings, 7.5 percent; ready-mixed concrete, 5.5 percent; and paving mixtures and blocks, 5.0 percent.”

The producer price index for inputs to construction industries, goods—a measure of all materials used in construction projects including items consumed by contractors, such as diesel fuel—rose 9.6 percent over 12 months. The year-over-year increase was the steepest since October 2008, Simonson noted.

ppi for construction

This kind of hyperinflation couldn’t come at a worse time for construction in Pittsburgh. Most of the anticipated boom in construction lies ahead. With labor nearly tapped out this summer, specialty contractors are beginning to price projects more cautiously and the result is stressing budgets. The upward pressure comes from several factors. Specialty contractors’ costs are roughly 50 percent labor. With the construction workforce at full employment in Pittsburgh, future work will be done with less people than necessary. Premium time and pay will be used to meet schedules. Contractors will be less certain about the productivity of the labor force. Uncertainty adds risk – and cost. Contractors will also begin to be maxed out on backlog (many already are), meaning that the projects they bid will have higher profit margins on their work. This isn’t greed; it’s simply the response to a shift to a seller’s market.

The results of this unexpected and steep jump in prices for owners will be higher costs for less program and the deferral of some projects for a time. That will chill the boom somewhat. The worse impact will be for contractors – and owners – that are locked into agreements before prices spiked and before projects were bought. If costs rise beyond what the contractors bid, disputes will increase and firms will do what is necessary to survive the inflation. None of those kinds of measures will make for better projects.

The many large private projects that will be built in Pittsburgh over the next 12-18 months have already begun to feel the impact on budgets. That hasn’t been the case in the public market, where bidding remains competitive. God bless the school district that signed big contracts based on bids taken in the past 90 days. They may want to wait until the punch list is complete to celebrate the great bids they received.