Sustained Economic Growth Continues to Increase Construction Costs and Labor Demand

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Sustained Economic Growth Continues to Increase Construction Costs and Labor Demand

Market Outlook 2017 Q1

The U.S. economy grew at a healthy rate in the first quarter of 2017, adding roughly 176,000 jobs per month. Capital construction prices continued their 2016 trend, increasing at an average of 6 percent, depending on location. Construction job growth was approximately 89,000 or 1.3 percent nationally. Energy and commodity prices continue to remain at levels not seen since the 1990s, due to abundant international and domestic supplies combined with a strong U.S. dollar.

Financial markets may be nearing the end of a restructuring phase, due to sustained commodity price declines. Consumer Price Inflation is now trending upward—currently escalating at 2.4 percent, compared to a 1.7 percent increase year over year in 2016.

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Construction Costs

Credit: 
Courtesy of Vermeulens

According to Vermeulens, construction costs have trended toward a 3.1 percent annually compounded escalation rate for the past 30 years. But, six consecutive years of above-average growth have now pushed the construction cost trendline from 3.1 percent to 3.3 percent.

Based on current inflation and labor market conditions, the target rate for federal funds will be maintained at one-half to three-quarters of a percent. Continued low interest rates are expected to support stability in the rate-sensitive construction sector.

Construction Volumes

Credit: 
Courtesy of Vermeulens

Construction dollar volume is the number one factor for construction costs, because bids increase as contractor opportunities and project backlogs grow. Construction dollar volume increased by 3 percent in the first quarter. While non-residential construction spending declined by 6 percent year over year—indicating a softening in commercial and industrial construction—infrastructure spending made up for it with a 10 percent increase. Residential construction spending increased by 6 percent.

Average selling prices increased by an average of 6 percent nationally in the first quarter of 2017. By comparison, Vermeulens saw an average selling price increase of 3 percent in 2011. Followed by a 6 percent increase in 2012, 8 percent in 2013, 6 percent in 2014, 8 percent in 2015, and 6 percent in 2016.

AIA Billings

Credit: 
Courtesy of Vermeulens

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 ABI averaged 51.5 in the first quarter of 2017, up slightly from the 2016 annual average of 51.2. This indicates healthy levels of construction activity later this year and into 2018. Firms in all regions reported billings growth in March.

Credit: 
Courtesy of Vermeulens

Firms in the Midwest (54.6), South (52.6), and Northeast (52.4) had the strongest growth in March, with firms in the West (50.2) growing more modestly. Architecture firms specializing in residential projects experienced the hottest growth (54.6) followed by institutional firms (52.9), with commercial and industrial firms experiencing a slight dip (49.8).

Labor Market

Credit: 
Courtesy of Vermeulens

The construction unemployment rate has been cycling downward and appears to be stabilizing near the benchmark established in the mid 2000s.

Sustained construction activity has increased industry employment by more than 1.2 million workers since 2011. Construction job growth in the first quarter was actually soft at 1.3 percent. The current slowing of employment growth in the sector is likely due to a lack of available workers. Wage increases are expected to draw employment from new entrants and other sectors.

Construction Labor Growth Rate

Credit: 
Courtesy of Vermeulens

Construction Labor Growth Rate is calculated by comparing the current 12-month average for construction employment relative to the previous 12-month average.

Forecast

Credit: 
Courtesy of Vermeulens

The New York Stock Exchange (blue line) is a strong indicator of construction prices, as improving equity markets provide capital and investment spending for construction.

Lower commodity prices (red line) have contributed to sustained economic growth since 2011. Commodity prices appear to have stabilized at reduced levels, which will reduce the room for cost inflation in other sectors such as construction.

Credit: 
Courtesy of Vermeulens

Currently, national construction prices are firm and stabilizing above the long-term trendline, and construction employment is at full capacity. This means that construction costs will continue to remain above the Construction Cost Trendline for the medium term.

By Johnathon Allen

This report is based on the Vermeulens Q1 2017 Market Outlook report.

For more information on the above report, please contact the Tradeline Editor

Project Data
Completion Date: 
June, 2017
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