Monday, March 3, 2014

The Lagging Construction Sector in America

Statistics showing spending on construction in the United States seem to be rising month after month, suggesting that the American economy is regaining losses experienced during the Great Recession, however, looking further back, it is quite apparent that the construction sector is still lagging behind.  

From FRED, here is a graph showing the growth in total construction spending since end of the last recession:

From its annualized low point of $754 billion in February 2011, total annual construction spending rose to $930 billion in December 2013, an increase of $176 billion or 23 percent, a rather impressive performance.

Unfortunately, as you can see when you look back further in time, the current situation is far from stellar:

Annual spending on construction reached a peak of $1.213 trillion in March 2006, $283 million or 30.4 percent higher than the current level.  In fact, the last time that construction spending was as low as it currently is (other than when spending was declining during the 2009 - 2010 economic retrenchment) was back in November 2003, over a decade ago.

Since total construction spending includes all sorts of residential and non-residential/public spending, let's drill down into the data to see where the problems lie.

Here is a graph showing the total annual spending on private residential construction since 1993:

Spending on residential construction hit a peak of $676 billion in March 2006 and began its painful decline to a low of $228 billion in June 2009, a drop of $448 billion or 66.3 percent.  Since then, spending on private residential construction has risen to $353 billion, an increase of $125 billion, however, spending is still $323 billion or nearly 50 percent less than it was at the peak.  You'll also notice a very prolonged period of time after the Great Recession when spending on residential construction was static; between March 2009 and December 2011, annual spending on private residential construction was stuck in the range of $225 billion and $255 billion, only beginning to show a sustainable rise at the beginning of 2012, nearly two and a half years after the recession "ended".

While there is no doubt that the housing bubble led to the high percentage of spending on residential housing, the long-term data shows us that the percentage of total construction spending that is comprised of residential spending is still not at "historically healthy" and sustainable levels as shown on this graph:

Over the period from 1993 to 2001, spending on residential construction made up between 40 and 46 percent of total construction spending, averaging 43.5 percent.  This peaked at 56.4 percent in December 2005 and fell to only 25.3 percent in May and June 2009.  Since then, it has recovered to its current level of 37.9 percent, still below the 20 year average of 40.1 percent and about 6 percentage points less than the level seen in the early part of the new millennium before the housing bubble began to form.

Now, let's switch gears and look at another type of construction spending.  Here's what happened to total public construction spending as shown on this graph:

You will quickly observe how differently this graph looks from the graph showing spending on private residential construction.  Public construction spending rose right through the Great Recession, peaking just as the Great Recession wound up in the first half of 2009.  Spending peaked at $325 billion in March 2009 and then began a slow decline to its current level of $267 billion, a drop of only $58 billion or 17.8 percent, a tiny fraction of the decline in residential construction spending.  

Just as I did for spending on residential construction, here is a graph showing the percentage of total construction spending that is comprised of publicly-funded construction spending:

This graph beautifully shows us what happened to government spending during the Great Recession.  For the 14 years prior to the last recession, public spending on construction averaged 23.8 percent of total construction spending, hitting a low of 20.5 percent at the beginning of 2006.  This ramped up very, very quickly during 2008 and 2009, hitting a peak of 39.4 percent in September 2010, nearly twice the level seen in the first half of the new millennium.  The ratio has slowly dropped, currently sitting at 28.6 percent, but is still nearly 5 percentage points higher than it was prior to the Great Contraction. 

Let's wrap up this posting by looking at what happened to employment in the all sectors of construction over the period from 1993 to the present:

Construction employment fell from 7.73 million in April 2006 to 5.43 million in January 2011, a loss of 2.3 million jobs.  Construction employment now sits at 5.92 million, still falling 1.81 million short of the peak.  While there is no doubt that the real estate bubble created a corresponding bubble in construction employment, the graph shows us that during the first few years of the new millennium prior to the housing bubble, the economy was quite capable of sustaining a construction employment level of around 6.8 million workers, 1.5 million more than the current level. 

Despite the Fed's massive experiment with unconventional monetary policy, only 490,000 construction jobs have been created over the past three years, hardly putting a dent in the number of construction jobs lost since the period between 2000 and 2006.  Additionally, as we can see from this posting, if it weren't for the still elevated levels of spending on public construction, the situation for those looking for work in the construction sector would be far worse than it is at the present time since spending on private residential construction as a percentage of total construction spending is still well short of the levels experienced prior to the housing bubble.

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