We might start by looking at the current outlook for new starts, backlog, and spending.
Construction starts increased by 4% in 2018, after increasing by 10% the year before. The number of new starts in 2019 is up 4%, including revisions. Starts are expected to fall by 4% in 2020. The current backlog has increased by 30% in the last four years, reaching an all-time high. Despite the fact that spending is expected to rise only 4% each year over the next two years, it is at an all-time high.
In 2018, the number of residential construction starts reached an all-time high. Starts in 2019 are flat year over year, but have been flat or declining since mid-2018. In 2020, spending is expected to increase by 5%, then decline by 1% in 2021.
For the four years 2017-2020, the starting backlog for nonresidential buildings climbed by 10% per year. Since mid-2018, starts have been flat or slightly declining. Starts in 2019 are down 9% from 2018. In 2020 and 2021, spending is expected to increase by 3%.
For the three years 2018-2020, the infrastructure starting backlog has grown at a rate of 15% per year. Spending is expected to increase by 6% in 2020 and 8% in 2021.
It’s crucial to know when spending from the backlog occurs. According to average cash flow curves for nonresidential projects, roughly 15% -20% of spending from new starts occurs in the first year, and about 40% -50 percent occurs the second year. Backlog accounts for 80% of all nonresidential spending in any given year. In the first year, a 10% reduction in new starts has just a 1.5 percent to 2% impact on total spending. Spending would fall by 4% to 5% the next year.
Residential spending is much more reliant on new construction than it is on backlog. Backlog accounts for just approximately 30% of residential spending, whereas new starts account for 70%. If new residential construction falls by 10%, total spending will fall by 7% in that year.
In the event of a recession, new construction starts would be drastically limited. Although some projects will be canceled or postponed in the middle of their construction, the majority of those that are already underway will be completed. The majority of the reduction is due to a decrease in new starters.
Residential starts fell 70% from $400 billion to $110 billion during the Great Recession, from 2005 to 2009.
Between 2008 and 2010, the number of nonresidential building starts fell by 35%. In 2009, non-building starts declined by only 6%. From $1.160 trillion in 2006 to $788 billion in 2011, total spending fell by 30%.
Whatever causes a building recession, in this case a global pandemic, the current enormous backlog of work will do everything it can to dampen its impact.
No analyst had predicted a significant drop in new construction starts in the coming years. Some predicted a slight slowdown at worst. Data up until today seemed to point to a mild slowdown.
Although Dodge predicts a 6% drop in the dollar value of home starts in 2020, the number of units recorded by the US Census in Q4 2019 is at a post-recession high, lowering the likelihood of such a drop.
It’s unclear how much current or new work will be canceled. This research cuts new construction starts by 20% in 2020 and 10% in 2021 from the baseline to gain a sense of how a recession would affect construction investment. That’s about normal for what happened during the Great Recession, but it was much higher in residential and much lower in non-building infrastructure at the time. Except for the Great Recession, only once in the last 20 years have new construction starts dropped more than 5% in any sector in a single year.
As a result, there would be 20% less work to bid on in 2020 and 10% less in 2021 compared to the baseline prediction. However, neither spending nor revenues would react in this way. The impact on spending, or revenues, is determined by the backlog and spending schedule curves.
Here’s how the spending graphs have changed as a result. The predicted spending to the right of the dateline is the only thing that varies.
Residential construction spending would fall by 14% in 2020 and subsequently by 13% in 2021, compared to the baseline scenario. Residential spending is significantly more reliant on fresh beginnings within the year than on backlog. As a result, residential spending falls faster than all other types of work.
Nonresidential Buildings spending is 4% lower in 2020 than it would have been in the baseline scenario, but then reduces 12% in 2021 and 10% in 2022. Because the backlog in this sector is substantial going into 2020, even though spending is 4 percent lower than the baseline, 2020 nevertheless sees a 1.5 percent increase in spending. 2021 sees an 8% drop, while 2022 sees a 1% increase.
Non-building infrastructure investment is 3% lower in 2020 than it would have been under the baseline scenario, but then reduces 9% in 2021 and 10% in 2022. Non-building infrastructure has so much work on the books that spending is expected to increase by 6% in 2020 and 1% in 2021. In 2022, it will decrease by 2%.
Most residential investment comes from new starts within the year, thus the largest declines in 2020 are in that sector; however, the strength of the backlog going into 2020 pushes most of the declines out to 2021 and 2022.
Total spending would fall from $1.365 trillion to $1.260 trillion in 2020, compared to the current expectation of $1.365 trillion. Instead of $1,370 trillion in baseline spending in 2021 and 2022, it would fall to $1.230 trillion, the same amount as in 2016. The Great Recession’s losses, which totaled about $400 billion, pushed construction investment growth back 12 years.
Boston was not alone in shutting down non-essential construction projects; New York and California followed suit. Construction spending in Boston is over $20 billion each year, whereas in New York and California, it is above $280 billion. Assume that all construction in California, New York, and Boston is halted for a month. Let’s say it accounts for 80% of all construction. In less than a month, $20 billion worth of work will be halted.
Temporary shutdowns differ from a reduction in fresh starts in that work shut down is postponed. In 2020, total spending will be reduced in that month, but the entire spending schedule will be shifted out by a number of months. Some of the work will resume in 2020, while others will most certainly be pushed to 2021 or later, but all of the delayed work will be completed eventually. If 20% of all building in the United States stopped for a month, $25 billion worth of work would be delayed for a month. If 20% of all new building starts in the United States in 2020 are canceled, the future workload will be reduced by $250 billion over the next three years.
The magnitude of spending cuts would have an impact on the labor market. Because employment losses of this level do not always coincide with volume losses, we are unlikely to see a staff decrease of this magnitude in 2020. However, spending cuts in 2021 and 2022 could result in the loss of 500,000 to 750,000 employment. We lost 2.3 million jobs over the duration of the Great Recession.
Is construction beneficial during a downturn?
A job search during the start of a recession, or even a modest economic slump, is never a good idea. Although the construction business is one that suffers the most when times are tough, that doesn’t make it a bad career option in general. When you see professionals who have been doing this for 30 or 40 years, you know they’ve persevered through difficult economic times. It’s logical to believe you can as well. If you’re concerned that a recession would force you to change careers, there are reasons to be optimistic about this one. Here are a few things to think about when you make your decision.
Is construction less expensive during a downturn?
In a downturn, do-it-yourself (DIY) projects are a terrific way to save money. Because labor hours account for the majority of contractor budgets, taking on tasks yourself will save you a lot of money. When you add in the fact that building materials are on sale during a recession, a DIYer can save even more money. Keep an eye out for specials at your local construction supply store.
What was the impact of the 2008 recession on the building industry?
2.1 million construction employees are currently unemployed. In the residential building industry alone, jobs have decreased by 38% since 2006. The construction industry’s “tool belt recession” is affecting other sectors of the economy as well. Many manufacturing industry sectors that make building items are currently working at close to half their production capacity due to falling demand for construction.
However, as alarming as these figures are, they are likely an underestimation of the problem due to the enormous number of self-employed construction workers who do not appear in payroll statistics, making the job situation considerably more dire than these figures reflect. Furthermore, the construction industry employs over 90% small firms, making it another another hard-hit sector of the economy.
This memo examines data from the Census Bureau, the Federal Reserve, and the Bureau of Labor Statistics to demonstrate the dire situation that blue-collar workers in America face today, as well as the home performance retrofit industry’s ability to quickly scale in terms of creating good American construction jobs.
This analysis clearly reveals that, in addition to having a ready-to-work labor pool in construction, the industry’s product producers also have enormous underused production capacity. As a result, if demand for building items increases, U.S. firms will immediately respond by rehiring laid-off workers.
Although labor accounts for a large portion of every renovation project, more than half of every dollar spent goes to retail and manufacturing through goods purchases. This means that a program that encourages new construction investment through energy efficiency upgrades would create jobs not only in the construction industry, but also in retail, manufacturing, and other local economic activity.
Understanding the tool belt recession
Take a look at what’s happening to construction workers across the country to understand why Americans are concerned about the future. While the unemployment rate in the United States finally fell below 10% in January, unemployment in the construction industry increased to 25%. If the economy as a whole, and the labor market in particular, is struggling, the position for workers in the construction trades, as well as the manufacturing and retail industries that support them, is far worse.
The construction industry has been hit particularly hard by the recession, as it is trapped between a financial crisis that has dried up funding for commercial real estate and the collapse of a housing bubble that has seen foreclosures soar as housing values plummet.
The tool belt recession by the numbers
Construction jobs and allied industries are suffering more than other sectors of the economy, resulting in persistently high unemployment and a considerable amount of available manufacturing capacity. Take into account the following:
Construction jobs
- In January 2010, the unemployment rate for experienced construction employees was 24.7 percent.
- Since 2006, total construction payroll employment has decreased by 2.1 million jobs, with residential construction employment down by 1.3 million jobs, or 38%.
- In 2009, 12.4 percent of all unemployed people had worked in the construction business previously.
- Since December 2007, there have been 134,000 employment losses (10%) in construction-related retail, such as building supply stores and lumber yards, with 186,000 job losses (14%) since July 2006.
Manufacturing jobs
- Manufacturing employment has decreased by 16 percent since the start of the crisis, but the situation is even worse in construction-related manufacturing, which includes:
A almost 22% drop in jobs in nonmetallic minerals, such as window glass
19% of jobs in fabricated metals, such as ducting, metal windows, and doors (291,000 jobs lost), have vanished, as have 19% of positions in HVAC equipment (19,000 jobs lost)
- In December 2009, manufacturing’s overall “capacity utilization,” or the rate at which factories are operating compared to their potential, was 68.9%. Construction-related sectors fared even worse, with many operating at less than half capacity, including wood products (51.5%), nonmetallic mineral goods (54.0%), and fabricated metal products (54.0%). (63.9 percent)
- Because the vast majority of manufactured products and raw materials used in residential alterations and repairs are produced in the United States, funds spent on house and building remodeling generally circulate within the United States. The rate of domestic manufacturing in many categories of building materials is considerably above 90%.
Construction job loss: A view from the ground
We examined the severity and broad dispersion of current job losses in the construction industry for this memo, assessing the fall in employment during the current recession from recent peak construction employment through December 2009.
Since the last peak in construction employment, 42 of the 44 states with available data have seen job losses of more than 10% of total construction jobs, 31 states have lost more than 20% of their construction jobs, 11 states have seen construction jobs drop by more than 30%, and four states have seen a decline in construction employment of more than 40% of total jobs. The overall trend of severe job loss in construction, considerably above national averages for all industries, appeared to be highly consistent in the seven states where credible state-level figures could not be found.
The “tool belt recession,” as we call it, is a dramatic loss in construction industry jobs that requires immediate attention and policy responses. When local construction job markets remain near-depression-level, it’s difficult to see a meaningful economic rebound on the ground in communities.
Before the overall economy enters a recession, residential construction, including remodeling, typically drops, and it endures bigger relative declines than other sectors. This is especially true in the most recent episode. Residential building investment, on the other hand, tends to recover ahead of the general economy, leading the way out of recession. However, the function of residential investment as a recovery engine has been missing in the present recovery.
Many employment have been lost in the building and construction-related industries as a result of the recession. Residential construction payroll employment fell approximately 38% from its peak in the spring of 2006, from 3.45 million to 2.15 million (seasonally adjusted) (Table 1). Overall employment did not peak until December 2007, and then dropped by 6%. (from 138 million to 129.5 million).
From peak levels to December 2009, the figure above (and Table 1 in the appendix) shows the fall in construction employment by state. Construction employment losses in some states are far higher than the national average of 26.2 percent. California (-36.1%), Florida (-41%), Michigan (-42.6%), Arizona (-46.1%), and Nevada (-46.1%) are among the worst-affected states (-46.8 percent). Since their peak employment levels, California, Florida, and Texas have together lost almost 750,000 construction jobs.
The number of people employed in the manufacturing and distribution of building materials has decreased more than the overall number of people employed in manufacturing and trade. The total number of jobs in retail trade has decreased by 7.5 percent since December 2007, but the loss in building materials and garden supply stores has been 10.4 percent. Construction supplies employment fell by 22.5 percent in the wholesale trade sector, which serves those retail stores, compared to only 8.1 percent overall. The impact of employment losses on companies related to construction and buildings is evident, and it stands out even in an overall bleak national economic picture.
Similarly, manufacturing has had extensive job losses, with a 15.9% drop in employment since December 2007. Construction-related manufacturing, on the other hand, dropped even more, with declines of 29.8% in wood products, 21.9 percent in nonmetallic minerals (including window glass, gypsum products, and fiberglass insulation), 18.7% in fabricated metals (ductwork, metal windows, and doors), and 19.3% in HVAC equipment.
Housing starts have stabilized in recent months, but employment in residential construction and allied industries has continued to fall due to the gap between housing starts and completions. Furthermore, growing weakness in nonresidential building construction, as well as a developing financial crisis in commercial real estate, will almost certainly result in further construction job losses for some time.
Counting job loss for self-employed construction workers
Unfortunately, the reduction in jobs reflected by payroll figures understates the actual loss of jobs due to the huge self-employed construction sector. According to economic census data, the proportion of self-employed workers in the construction industry is much greater.
The construction sector is highly fragmented, relying on labor markets that are far more flexible than capital equipment assets. When demand declines, this industrial organization makes it easier to downsize, but it also allows for rapid expansion when demand rises.
General contractors, who plan complicated projects and execute a number of responsibilities, and special trade contractors, who conduct specialized types of work like roofing or plumbing, are both part of the sector. Whether for new construction or upgrades and repairs to existing facilities, special trade contractors perform the vast majority of actual job-site production. Because many of these subcontractors are self-employed, they are frequently undercounted in official job loss statistics.
General remodeling contractors, who oversee work in a variety of specializations, are more likely than new home builders to employ construction workers, but even in remodeling, the majority of labor is outsourced. Similarly, while some people own a home, others do not.
Construction, installation, and house repair services are commonly subcontracted by shopping centers and other stores.
Although some special trade contractors are medium-sized businesses (with more employees than the general contractors they represent), the majority are small businesses or self-employed independent contractors. Because other construction categories, such as bridge construction, have fewer self-employed individuals, the self-employed share for changes and repairs to existing residences is higher than the industry average.
Individuals working on their own aren’t the only self-employed workers in the sector. Many are owners of unincorporated firms with employees on the payroll. As a result, employment loss statistics understates the severity of the current job crisis, and focused actions to assist construction can have far-reaching consequences for local economies.
Construction jobs and small businesses
When you look at the specialty trades that undertake energy retrofits, you’ll notice that the job losses indicated before are disproportionately affecting small firms. According to research conducted by the Energy Future Coalition, small businesses participate in building at extremely high rates:
- Insulation, for example, is installed by over 22,000 companies, with 85 percent employing fewer than 20 people.
- Roofing insulation is also installed by approximately 20,000 contractors across the country, with 88% of them employing fewer than 20 people.
- More than 130,000 individuals work for over 7,000 companies in the United States to manufacture and install windows, with 82 percent of them employing fewer than 20 people.
- In the United States, around 2 million people work in the manufacturing and installation of HVAC equipment, with nearly 90% of them employed by businesses with fewer than 20 employees.
- In the United States, nearly 850,000 people manufacture or install interior or exterior lighting equipment, with nearly 90% of them working for businesses with fewer than 20 employees.
Jumpstarting demand for manufacturing
Because of the fall in both residential and nonresidential building, there is currently a lot of idle or underused capacity in labor markets and manufacturing facilities all over America.
In January 2010, for example, the unemployment rate for experienced construction employees was 24.7 percent. Although seasonal considerations had a role, the average for 2009 was 19.1%, and the most recent statistic was 6.5 percentage points higher than in January 2009.
Lower capacity utilization rates result in idle production lines, unworked shifts, and big swaths of the workforce being furloughed or laid off. According to the Federal Reserve Board, the overall capacity utilization rate in manufacturing was only 68.9% in December 2009 (see Table 2 in the appendix), implying that roughly a third of our industrial capacity was underutilized. But it was even lower in other industries, where we were only using half of our total industrial capacity. For wood goods, for example, this amounts to 51.5 percent, 54.0 percent for nonmetallic mineral items, and 63.9 percent for fabricated metal products.
The Federal Reserve does not disclose more precise industry classifications in its monthly data on capacity utilization, although housing-related manufacturing is probably running at much lower levels of capacity. The Census Bureau’s quarterly figures with additional information reveal capacity utilization for paint, coatings, and adhesives (NAICS 3255) at 56.7 percent in the third quarter of 2009, despite overall capacity utilization for the chemical industrial group (NAICS 325) being over 72 percent.
The conclusion that can be derived from this data is that, in addition to having a ready-to-work labor pool in construction, the product manufacturers that serve the industry also have large underused production capacity. If demand for building products increases, American firms will immediately respond by rehiring laid-off workers.
Building demand for jobs through home energy retrofits
Few sections of the current economic landscape appear to be poised for job growth in the construction industry. However, in the domain of energy efficient retrofits of our nation’s building stock, there is one important exception. A program that incentivizes energy efficiency upgrades would generate jobs in the construction industry, as well as retail, manufacturing, and local economic activity.
Labor and other expenditures incurred on the work account for a large portion of existing house improvement and repair costs. However, materials, distribution, and other acquired services account for more than half of the cost of home energy efficiency retrofits. Of
Roughly 9% of every dollar spent on adjustments and repairs goes to the retail sector, and about 3% goes to the wholesale trade (for those products purchased by contractors directly from wholesalers).
The proportion of residential renovation and other residential construction that flows to and through retail commerce is substantially higher than that of other enterprises, which may simply use retail shops to acquire office supplies and other minor products. This is due in part to the industry’s unequal demands and fragmented structure. As a result, a building crisis swiftly becomes a crisis not only for manufacturing supply chains, but also for retail and wholesale enterprises.
Retailers of building materials offer a variety of services in addition to refilling shelves and ringing up sales. Home centers, lumber yards, appliance dealers, hardware stores, and other specialist outlets cut and build things to specifications, deliver to job sites, manage special orders, seek for obscure products and supplies, and frequently issue credit. In other words, a reduction in construction jobs has a significant influence on the larger local economy. However, a scheme to increase demand for local construction jobs through retrofits would have far-reaching immediate local advantages.
The components comprise a bigger percentage of the installation cost for state-of-the-art, high-energy-performance building components and mechanical systems, such as ultra-efficient heating, air conditioning, and water heating equipment, as well as insulated ducts and premium windows. While onsite labor is not eliminated, it accounts for a lower percentage of these employment. Furthermore, the amount of material used in the production of such goods is greater than that used in the production of standard-quality goods. In comparison to weatherization operations such as air sealing, more jobs would be created in manufacturing and the supply chain rather than on the job site for these types of building retrofits.
It’s also worth noting that the vast majority of manufactured products and raw materials used in home improvements and repairs are made in the United States. As a result, jobs in the construction industry disproportionately benefit American industries and employees.
Responding to the tool belt recession with retrofit jobs
In today’s market, there are more than 2 million unemployed individuals in the construction and construction-related industries who are looking for work that will allow them to use their abilities. The growing home performance industry, which retrofits buildings to improve total energy efficiency and save consumers money, represents a massive and cost-effective opportunity to repurpose our country’s workforce and promote energy independence while addressing the need to reduce energy bills, waste, and pollution.
While saving consumers up to $64 billion every year on energy expenditures that might be spent elsewhere. Retrofitting homes for efficiency isn’t only a question of sound energy policy; it’s also a bright spot in an otherwise bleak economy, where we can stimulate investment and get contractors back to work.
Smart public policy can assist in overcoming current impediments to private investment in more energy efficient buildings, as well as stimulate jobs and growth in the construction trades and related industries. Currently, Congress is debating HOME STAR, a consumer incentive program that offers a return to homeowners who engage directly in energy efficiency improvements. When homeowners purchase a new efficient hot water heater, furnace, or air conditioning system, they will receive a direct reimbursement from HOME STAR, which might save them money.
For millions of American homes, the cost of fixing leaky windows, sealing ductwork, and insulating attics has been cut in half. Building consumer demand for energy retrofits through HOME STAR will not only provide consumers with a $3,000 to $8,000 rebate, but will also help them save money.
long-term energy savings, but it will also generate fresh construction demand, putting contractors back to work.
HOME STAR would be quick to act and would rely on the existing market to deliver retrofits to households with the least amount of new government spending. It also creates a well-trained workforce and increases consumer demand for high-quality retrofits that guarantee savings of 20% or more on current energy expenditures. This is a policy that works quickly to produce much-needed jobs now while also establishing a strong sector for the future.
Federal policy could also target commercial building retrofits through a Building Star program that stimulates investment in high-performance office buildings for maximum job benefits. Similarly, incentives for industrial energy efficiency retrofits should be matched. A HOME STAR program for residential homeowners should be at the forefront of any national initiative to reverse the tool belt slump. There are additional critical job-creating measures being considered right now that would stimulate the market for energy-saving retrofits in both commercial and industrial buildings, as well as expand access to finance for retrofit jobs, to help these markets grow faster.
The current level of unemployment in the construction and building trades has reached crisis proportions. It’s past time for a national program to reverse these job losses and re-employ industrious Americans in the construction industry, rebuilding America for a clean-energy future that saves consumers money, improves health and comfort, and adds long-term value to our communities.
Bracken Hendricks and Tom Kenworthy’s HOME STAR: Putting Americans Back to Work
Matt Golden is the CEO of Recurve, and Bracken Hendricks is a Senior Fellow at American Progress.
Pursue projects that effectively use available manpower and equipment
Making the most of your available resources will help you maintain project profit margins high, which is exactly what you need when the flow of work stops.
If your construction company decides to take on a project that is too big, it may face equipment and staff shortages. A project that is too small, on the other hand, would not be an efficient use of the same resources, resulting in reduced profit margins.
Examining jobs you’ve performed over the last several years and noting which ones were the most successful is one technique to discover the most efficient use of your resources. Pay attention to their scope, timeline, and budget, and then utilize this information to design (and pursue) ideal projects for your company.
Focus on attracting employment that meet this “ideal project” criteria during a recession. These are the initiatives with the highest profit potential.
How can a construction company weather the storm?
6 Ways to Make Your Construction Company Recession-Proof
- Make sure you have cash on hand. It’s a good idea to save enough money to get your firm through a bad patch.
What was the impact of the Great Depression on the construction industry?
According to their estimates, the value of all building plummeted from a high of $11,339,000,000 in 1928 to less than $3,000,000,000 in 1933, a drop of about 74%. In 1926, governmental works expenditures were less than half of overall private construction expenditures.
In a recession, do prices rise or fall?
- We must first grasp the business cycle in order to comprehend the state of the economy and how recessions affect investors.
- The business cycle describes the swings in economic activity that a country’s economy goes through throughout time.
- The economy is strong and growing at the top of the business cycle, and company stock values are frequently at all-time highs.
- Income and employment fall during the recession phase of the business cycle, and stock prices fall as companies fight to maintain profitability.
- When stock prices rise after a big decrease, it indicates that the economy has entered the trough phase of the business cycle.
During a recession, what happens to the price of goods?
A drop in pricing is related with a recession. This makes intuitive sense, but it’s also seen in a graph of aggregate demand and supply during a recession. Businesses must decrease prices to keep sales up when people lose their jobs and can no longer afford to pay as much. The supply and demand curves support this, as a shift to the left in the demand curve results in lower equilibrium price and demand levels, where supply and demand meet.
Is the example of * when construction employees were laid off during the Great Recession following the financial crisis of 2008?
Construction employees were laid off during the Great Recession following the financial crisis of 2008. This is an example of cyclical unemployment. Construction of new homes declined substantially when the housing market deteriorated, resulting in an increase in cyclical unemployment among construction employees. Consumers began purchasing homes again as the economy improved, resulting in a housing market resurgence. As a result, new home development surged, resulting in more construction workers being rehired, resulting in a drop in cyclical unemployment.