The U.S. economy continued growing at a healthy rate in 2015, adding approximately 221,000 jobs per month over the year. Wage and profit increases in the construction sector are expected to pull new entrants into the labor force with some restructuring from other sectors of the economy, for example energy and exports. Construction prices increased nationally, trending toward 8 percent, depending on location.
Construction Costs
Construction costs have trended toward a 3.1 percent annually compounded escalation rate for the past 30 years. Year-over-year CPI inflation is now trending below the Federal Reserve’s long-term targets, due to the extended decline in energy prices.
According to Blair Tennant, a project manager and cost engineer for Vermeulens, the rate of construction cost escalation is related to the federal goal of achieving an annual inflation rate of 2 to 3 percent, and the monetary policies used to achieve this. With the removal of quantitative easing by the Federal Reserve, the economy has reached a self-sustaining phase of expansion.
Cost escalation in the construction sector will have room to increase at a higher rate. While inflation is expected to remain near its current low level for the short term, the Federal Reserve expects it to rise gradually toward 2 percent over the medium term, as labor markets improve and cost reductions in energy and import prices disappear.
Construction Volumes
Construction dollar volume is the number one factor for construction costs, because bids increase as contractor opportunities and project backlogs grow.
Overall volume grew 21 percent in 2015. Non-residential construction spending rebounded nearly 47 percent from its bottom, while residential dollar volume has recovered and is currently 66 percent higher than its bottom in July 2011. Existing home inventories remain at 5.2 months as favorable credit conditions, low vacancy rates, and steady income growth help to increase household formation.
AIA Billings
The Architectural Billings Index (ABI) is a key indicator of expected construction volumes nine to 12 months in advance. A score greater than 50 indicates growth.
The year finished on an up-note for architectural billings after a volatile few months in Q4. The December ABI score of 50.9 represented a slight tick up from 49.3 in November, while the new projects inquiry index was 60.2, up from a score of 58.6 the previous month. The year-end surge in billing activity was led by residential and institutional firms in the West (53.7) and South (53.3), while the Northeast (46.1) and Midwest softened (46.7).
After leading the pack for most of the year, commercial/industrial billings finished out 2015 as the weakest sector (47.3); residential is the strongest sector (52.9); while institutional billing also finished out the year strong (52.2).
Labor Market
Compared to previous years, 2015 saw a significant reduction in construction job growth, though an up-tick in Q4 2015 shows a renewed expansion indicating future growth.
The construction unemployment rate is returning to the long-term average with seasonal fluctuations between 5 and 12 percent. The slowdown in 2015 construction job growth is expected to result in wage and productivity increases, as construction dollar volumes expand.
Total job growth in the U.S. economy slowed slightly in 2015, averaging roughly 221,000 per month for the last year. Job growth can continue at 250,000 jobs per month for three years before reaching the upper end of the target range. At 350,000 jobs per month, the upper range will be met in two years.
Labor Capacity Utilization
Labor capacity utilization is calculated by comparing the ratio of current construction employment to peak construction employment, and allowing for a sustainable rate of growth. A utilization rate of greater than 85 percent (yellow) puts upward pressure on construction labor costs.
Regional imbalances in capacity utilization are leveling off entering 2016. Currently, 47 percent of states have warmed to either a yellow or orange Labor Utilization Rate, as have 60 percent of the top 20 U.S. Cities (by GDP).
Forecast
Regionally, inflation is expected to increase at greater rates in urban centers like Denver, where labor utilization has turned red and now represents 106 percent of the state’s available construction labor force. This also has the result of pushing up Wyoming construction costs.
Construction prices are now firm and increasing above the long-term trend line. Nationally, construction prices are expected to escalate above the trend line in 2016, as construction volume increases, and labor capacity narrows.
By Johnathon Allen
This report is based on the Vermeulens Q4 2015 Market Outlook.
