Slip in construction spending a sign of bigger problems facing construction

By Jenny LescohierSeptember 07, 2022

Seventy-one percent of construction firms surveyed expect to add employees in the next 12 months

Overall construction spending slipped in July, a sign that labor shortages and supply chain challenges are making it difficult for contractors to complete projects, but many remain optimistic about rising demand, especially in publicly financed construction where spending actually took a jump. 

To help meet the anticipated increasing demand for new construction, industry officials are urging public leaders to reform immigration policy to allow more potential workers to lawfully enter the country. 

Drop in residential spending overshadows gains in other sectors

Total construction spending decreased by 0.4% in July as spending on new houses and apartments tumbled, overshadowing a pickup in private nonresidential and public construction, according to an analysis of federal spending data by the Associated General Contractors of America. Association officials said their newly released survey, conducted with Autodesk, showed labor shortages and supply chain problems are limiting the ability to complete projects, likely undermining total construction spending levels.

“There were gains for the month for nearly every private nonresidential category, along with a jump in highway and transportation work,” said Ken Simonson, the association’s chief economist. “But our survey found every type of contractor is facing challenges in finding enough qualified workers to meet the demand that is probably limiting total construction activity.”

The association’s survey found contractors broadly optimistic about demand for projects, Simonson said. Seventy-one percent of the firms expect to add employees in the next 12 months. But shortages of workers had caused projects to be delayed for 66% of the firms, and 82% had experienced delays due to shortages or longer lead times for acquiring materials.

Construction spending, not adjusted for inflation, totaled $1.78 trillion at a seasonally adjusted annual rate in July, 0.4% below the upwardly revised June rate but 8.5% higher than in July 2021. Private nonresidential construction spending rose for the third month in a row, increasing 0.4% from June.

Public construction spending climbed 1.5% from June, however, these increases were negated by a 1.5% decline in private residential spending. That segment was dragged down by a 4% slide in new single-family spending and a dip of 0.6% in multifamily spending.

Ten of the 11 private nonresidential categories in the government’s release had at least minor upturns in July, Simonson noted. The largest private segment, commercial construction - warehouse, retail and farm projects - increased 0.7%. Power construction, including spending on oil and gas projects, rose marginally. Manufacturing construction added 0.6%. Office construction spending, including data centers, climbed 0.6%.

The largest public category, highway and street construction, leaped 4.4% for the month. Other major segments were mixed: spending on education structures inched down 0.1%, while outlays for transportation facilities rose 1.4%.

Publicly financed construction jumps in July

National nonresidential construction spending increased 0.8% in July, according to an Associated Builders and Contractors analysis of data published by the U.S. Census Bureau. On a seasonally adjusted annualized basis, nonresidential spending totaled $847.6 billion for the month.

Spending was up on a monthly basis in 13 of the 16 nonresidential subcategories. Private nonresidential spending was up 0.4%, while public nonresidential

construction spending was up 1.5% in July.

“The nonresidential sector continues to grapple with rising borrowing costs, elevated materials and labor costs and pervasive economic pessimism,” noted ABC Chief Economist Anirban Basu. “Despite a modest increase in July, nonresidential construction spending remains below its pre-pandemic level.

“There is, however, at least one bright spot for the industry: publicly financed construction. State and local governments are flush with cash, and considerable funding is slated for various forms of infrastructure. In July, spending in the highway and street category increased 4.4%, while spending in the public safety category rose 2.3%.

But it’s not all good news for the sector. 

“For privately financed construction, circumstances could get worse before they get better,” said Basu. “The Federal Reserve recently recommitted to further tightening monetary policy. Market sentiment quickly turned negative. Rather than disappear, supply chain challenges are proliferating in much of the world, including in Europe and China, and the risk of recession is elevated.

“This is simply not a set of circumstances conducive to rapid nonresidential construction spending growth, and according to the most recent Construction Confidence Index, just 31% of contractors expect their profit margins to grow over the next six months.”

Construction employment trends show some promise

Meanwhile, construction unemployment rose in August to 3.9%, according to the federal Bureau of Labor Statistics. That’s up from July’s near record low of 3.5%, which as Simonson noted, “essentially means there’s almost nobody out there with construction experience looking for a new job in construction.”

In nonresidential construction specifically, employment rose by a net 4,300 positions, according to ABC’s analysis which showed there were 5,600 new jobs in nonresidential specialty trades and 700 in nonresidential building. Heavy and civil engineering employment, however, fell by 2,000 positions.

Number crunching aside, industry officials agree construction faces formidable headwinds in the form of a limited labor pool and lingering supply chain problems.

Where labor is concerned, some are asking public leaders to take decisive action.

AGC, for its part, has urged public leaders to boost funding for construction-focused education and training programs and has also called for immigration reform to allow more people with construction skills to lawfully enter the country.

“Without enough workers to keep pace with demand, the federal government’s new infrastructure funding and more recent investments in semiconductor factories and energy infrastructure projects will not deliver as much as promised,” Simonson warned. 

“It is hard to build without builders,” he said. “Getting more people exposed to construction is the surest way to expand the industry’s workforce and put more people into high-paying construction careers.

“There is plenty of work for the industry to perform, there just aren’t enough people to do the work or materials to complete the projects. Addressing labor shortages and supply chain problems will ensure that the construction industry can upgrade America’s infrastructure, modernize its manufacturing sector and help deliver a more reliable and cleaner energy grid.”

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