US & PA Construction Spending, Labor and Materials Outlook

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1 US & PA Construction Spending, Labor and Materials Outlook PCBE, Philadelphia September 7, 2018 Ken Simonson Chief Economist, AGC of America

2 2 Headline Forecast The US economy is strong and growing; 4.2% 2 nd quarter real GDP growth; consumer, business confidence are high Trade tensions continue as tariffs, retaliation widen; metals, lumber and other prices rising at double digit rates, squeezing contractors profits Construction employment is rising at 3x the rate of overall employment; unemployment is at an 18 year low; majority of contractors regardless of sector or size are struggling to fill craft and other skilled positions AGC priorities: infrastructure, career training and education, immigration Source: Author

3 3 Construction spending & employment, Spending put in place, Feb. 06 (prior peak) July 18 $1.40 $1.20 trillion $, seasonally adjusted annual rate 7/18 Total: $1.32 trillion (9% above 06 peak) 7/17 7/18 % change: Total: 5.8% 8 Employment, April 06 (peak) July 18 millions, seasonally adjusted 7/18 Total: 7.2 million (6% below peak) 7/17 7/18 % change: Total: 4.4% $ Private nonresidential (9% above 08 peak) Private residential (17% below 06 peak) Public (6% below 09 peak) Private res: 6.7% Private nonres: 3.2% Public: 8.3% 4 2 Nonresidential (1% below 08 peak) Residential (18% below 06 peak) Nonres: 3.5% Res: 5.2% Source: spending U.S. Census Bureau; employment Bureau of Labor Statistics

4 4 Nonresidential spending by segment: 2017 change, 2018 forecast 2017 vs Jan July 18 vs. Jan July forecast 2018: 2 4% 2019: 2 5% Nonresidential total (public+private) 0.5% 3% Power (incl. oil & gas field structures, pipelines) % Educational % Highway and street % Commercial (retail, warehouse, farm) % Office % Manufacturing to 0% Transportation % Health care % Lodging % Sewage & waste disposal % Other amusement; communication; religious; public safety; conservation; water: 11% of 17 total % Source: U.S. Census Bureau construction spending report; Author s forecast

5 5 Construction spending: industrial, heavy annual total, ; monthly (seasonally adjusted annual rate), 1/16 7/18; billion $ $120 $90 $60 $30 Power (94% private in 2017) '08 '15 total electric oil & gas '16 '17 '18 July 17 July '18: 8% (oil & gas 17%; electric 6%) $120 $90 $60 $30 Manufacturing (99% private in 2017) '08 '15 '16 '17 '18 total other chemical July 17 July '18: 5% (chemical 12%; other 2%) Amusement & recreation (55% private in 2017) $30 total $30 Communication (99.5% private in 2017) $20 private $20 $10 public $10 '08 '15 '16 '17 '18 '08 '15 '16 '17 '18 July 17 July '18: 2% (private 2%; public 1%) July 17 July '18: 6% Source: U.S. Census Bureau construction spending report

6 6 Key points: power & energy, mfg, amusement, communication Solar, wind power are growing again; expect more gas fired plants, natural gas pipelines in 18 and 19 Manufacturing construction should recover later in 18 and 19 based on energy projects, U.S. economic growth; but tariffs, foreign retaliation, rising construction costs are major concerns Amusement & recreation spending is very lumpy a few big stadiums at irregular intervals; but funding for local, state, federal parks keeps eroding Communication may revive as wireless firms build out 5G networks Source: Author

7 7 $120 $90 $60 $30 Construction spending: public works annual total, ; monthly (seasonally adjusted annual rate), 1/16 7/18; billion $ Highways (99.8% public in 2017) $60 $40 $20 Transportation facilities (air, transit, rail, water) total other air '08 '15 '16 '17 '18 $30 July 17 July '18: 10% Sewage/waste & water (sewage 99% public in 2017; water 98% public in 2017) $30 '08 '15 '16 '17 '18 July 17 July '18: 20% (air 48%; other 7%) Conservation and development (99.7% public in 2017) $20 $10 sewage/ waste water $20 $10 '08 '15 '16 '17 '18 July 17 July '18: Sewage/waste 15%, water 33% '08 '15 '16 '17 '18 July 17 July '18: 29% Source: U.S. Census Bureau construction spending report

8 8 Key points: roads, transportation, sewer/water State highway funding and P3s gradually increasing but federal funding likely to be flat through 2018; pickup likely by 2019 Many new and ongoing public & private airport projects; revival of freight rail construction; but no net increase likely in public funding for port, passenger rail or transit construction Water & sewer/wastewater spending returning to levels after large drop in ; little long term new funding likely Conservation may grow if Corps of Engineers can award enough $ Source: Author

9 9 Construction spending: education, health care annual total, ; monthly (seasonally adjusted annual rate), 1/16 7/18; billion $ Education: (state/local K 12, S/L higher; private) $100 Health care: (private hospital, S/L hospital, other) $50 $75 total (78% public) $40 total (79% private) $30 $50 state/local prek 12 $20 private hospital $25 state/local higher ed private $10 Other state/local hospital '08 '15 '16 '17 '18 '08 '15 '16 '17 '18 July 17 July '18: 3% (state/local prek 12 1%; state/local higher ed 1%; private 6%) July 17 July '18: 0% (private hospital 10%; S/L hospital 18%; other: special care, medical office, federal 15%) Source: U.S. Census Bureau construction spending report

10 10 Key points: education & health care Rising house & commercial property values are supporting school district tax receipts & bond issues for prek 12 projects Higher ed enrollment declined 21% from 2011 to 2016; likely decrease in full tuition foreign students will hurt budget; apts. (multifamily) replacing dorms (educational construction) Rising stock prices help private school & college capital campaigns Despite recent rebound in hospital spending, health care spending is shifting to special care facilities (urgent care, surgery, rehab, hospices) Source: Author

11 11 Construction spending: developer financed annual total, ; monthly (seasonally adjusted annual rate), 1/16 7/18; billion $ $80 Retail (private) $80 Office (88% private in 2017) Total $60 $40 $60 $40 Private $20 '08 '15 '16 '17 '18 July 17 July '18: 8% $20 Public '08 '15 '16 '17 '18 July 17 July '18 : 9% (private 7%; public 24%) Warehouse (private) Lodging (private) $40 $40 $30 $30 $20 $20 $10 $10 '08 '15 '16 '17 '18 '08 '15 '16 '17 '18 July 17 July '18: 13% July 17 July '18: 8% Source: U.S. Census Bureau construction spending report

12 12 Key points: retail, warehouse, office, hotel, data centers Retail now tied to mixed use buildings & renovations, not standalone structures; massive store closings imply downturn continuing into 19 Warehouse growth is still benefiting from e commerce; more local than huge regional distribution centers likely in future; self storage is booming Office growth is slowing; employment still rising but space per worker is shrinking; more urban & renovation work than suburban office parks Hotel pipeline is still growing but sector is very interest rate sensitive Data centers remain a strong niche but no data available on how strong Source: Author

13 13 Private residential spending: steady single family growth, slower multifamily annual total, ; monthly (seasonally adjusted annual rate), 1/16 7/18; billion $ $600 Spending put in place (billion $) 30% 12 month % change $500 Private total (17% below Feb 06 peak) 25% 20% $400 $300 $200 Single family (39% below Feb 06 peak) 12 month % change 15% 10% 5% 7/17 7/18: Improvements: 9% Private total: 7% Single family: 6% $100 '06 '15 Improvements (3% below May 18 peak) Multifamily (9% below Apr 17 peak) '16 '17 '18 0% 5% 10% Multifamily: 1% Source: U.S. Census Bureau construction spending report

14 14 Residential spending forecast 2018: 6 9% growth; 2019: 7 10% (12% in 2017) SF 2018: 8 10% growth; 2019: 8 12% (11% in 2017); rising interest rates, building costs, student debt will limit number of potential buyers MF 2018: near 0; 2019: 2 5% ( 2% in 2017) occupancy rates, rents have leveled off; but permits are rising, implying rebound in 2019 millennials are staying longer in cities and denser suburbs where MF construction is bigger share of market than in outer suburbs nearly all MF construction is rental, not condo; more high rises Improvements 2018: 10 15% growth; 2018: 5 10% (19% in 2017); rising number of seniors prefer remodeling to moving but interest cost, labor scarcity are barriers Source: Author

15 15 Population change by state, July 2016 July 2017 (U.S.: 0.72%) decrease % % % 1.5%+ 0.6% 1.7% 1.4% 2.0% 2.2% 1.6% 1.9% 1.1% 1.0% 0.1% 1.4% 0.02% 0.9% 0.7% 0.2% 0.2% 0.9% 0.4% 0.5% 0.3% 0.4% 0.5% 0.1% 0.3% 0.1% 0.3% 0.5% 0.7% 0.7% 0.4% 1.1% 1.0% 0.04% 0.3% 1.3% 1.1% 0.4% CT 0.0% DE 1.0% MD 0.5% NH 0.6% VT 0.0% MA 0.5% RI 0.2% NJ 0.3% DC 1.4% AK 0.2% 1.4% 0.04% 1.6% HI 0.1% Source: U.S. Census Bureau

16 16 State construction employment change (U.S.: 4.4%) 7/17 to 7/18: 45 states and DC up, 5 down Top 5 Over 10% 5.1% to 10% 0.1% to 5% 0% 0.1% to 5% 5.1% to 10% Over 10% NV 10.9% GA 10.1% AZ 10.0% NH 9.8% OR 9.1% Bottom 5 OK 0.9% KY 1.0% MO 1.0% SC 2.3% NJ 3.9% 5% 4% 9% 11% 1% 5% 10% 3% 4% HI 1% 6% 9% 4% 3% 6% 8% 1% 1% 1% 4% 5% 1% 4% 2% 5% 3% 5% 2% 9% 2% 1% 1% 3% 10% 8% 5% 2% 8% 1% 4% 3% 7% CT 6% DE 6% MD 0% NH 10% VT 2% MA 8% RI 5% NJ 4% DC 4% Shading based on unrounded numbers Source: BLS state and regional employment report

17 Top 5 Merced, CA 32% Midland, TX 26% New Bedford, MA NECTA 22% Miami Miami Beach Kendall FL Div. 17% Bellingham, WA 17% Metro construction employment change (U.S.: 4.

17 17 Top 5 Merced, CA 32% Midland, TX 26% New Bedford, MA NECTA 22% Miami Miami Beach Kendall FL Div. 17% Bellingham, WA 17% Metro construction employment change (U.S.: 4.4%) 7/17 to 7/18: 282 (79%) of 358 metros up, 35 unchanged, 41 (11%) down Over 10% 5.1% to 10% 0.1% to 5% 0% 0.1% to 5% 5.1% to 10% Over 10% Bottom 5 Middlesex Monmouth Ocean, NJ 10% Columbia, SC 10% Spokane Spokane Valley, WA 10% Camden, NJ Div. 8% Ogden Clearfield, UT 8% Ithaca, NY 8% Bloomsburg Berwick, PA 8% Source: BLS state and regional employment report

18 18 Construction Employment Change from Year Ago 1/08 7/18 (not seasonally adjusted) 12 month % change 10% 5% 0% 5% 10% Philadephia* 5.8% U.S. 4.2% Pennsylvania 1.7% 15% 20% *The Bureau of Labor Statistics reports employment for construction, mining and logging combined for metro areas in which mining and logging have few employers. Source: BLS

19 19 Change in construction employment, 7/17 7/18 (NSA) Metro area or division 12 mo. empl. change (NSA) Rank (out of 358) Statewide (Construction) 2% Statewide (Mining, logging, and 2% construction)* Allentown Bethlehem Easton, PA NJ 4% 183 Altoona, PA 3% 223 Bloomsburg Berwick, PA 8% 352 Chambersburg Waynesboro, PA 0% 282 Delaware County, PA 6% 117 East Stroudsburg, PA 5% 150 Erie, PA 7% 89 Gettysburg, PA 5% 150 Harrisburg Carlisle, PA 3% 223 Johnstown, PA 0% 282 Lancaster, PA 5% 150 Source: AGC rankings, calculated from BLS state and area employment reports 12 mo. empl. change (NSA) Rank (out of 358) Metro area or division Montgomery County Bucks County Chester County Div.* 1% 266 Philadelphia, PA Div. 6% 117 Pittsburgh, PA 3% 223 Reading, PA 6% 117 Scranton Wilkes Barre Hazleton, PA 1% 266 York Hanover, PA 1% 319 Newark, NJ PA Div. 5% 347 Youngstown Warren Boardman, OH PA 5% 150 *The Bureau of Labor Statistics reports employment for construction, mining and logging combined for metro areas in which mining and logging have few employers. To allow comparisons between states and their metros, the table shows combined employment change for these metros. Not seasonally adjusted statewide data is shown for both construction only and combined employment change.

20 20 Construction employment change by PA metro, 7/17 7/18 Youngstown Warren Boardman, OH PA Erie Pittsburg Johnstown Altoona Bloomsburg Berwick Scranton Wilkes Barre Hazleton Allentown Bethlehem Easton, PA NJ Reading Harrisburg Carlisle Lancaster York Hanover East Stroudsburg Newark, NJ PA Div. Montgomery County Bucks County Chester County Div. Philadelphia Div. Delaware County Over 10% 5.1% to 10% 0.1% to 5% 0% 0.1% to 5% 5.1% to 10% Over 10% Shading based on unrounded numbers Source: BLS state and regional employment report 20

21 21 Construction workforce indicators (not seasonally adjusted) 1,800,000 1,600,000 1,400,000 1,200,000 1,000, , , , ,000 0 Construction hires, openings, and unemployment, June 2001 June 2018 Unemployment Hires Openings '01 '02 '04 '06 '08 '10 '12 '14 '16 ' % 4% 3% 2% 1% 0% Ratios of unemployed to hires and openings to hires, June 2001 June 2018 Openings to hires Unemployed to hires '01 '02 '04 '06 '08 '10 '12 '14 '16 '18 Construction and all private production and nonsupervisory employees: avg. hourly earnings, 12 mo. % change, 7/01 7/18 Construction All private '01 '02 '04 '06 '08 '10 '12 '14 '16 ' Source: Bureau of Labor Statistics

22 22 Hardest positions to fill (% having trouble filling out of firms that employ) Hourly craft (80% having trouble filling) Pipelayers 72% 12% 84% Sheet metal workers 68% 13% 81% Carpenters 67% 13% 80% Concrete workers 67% 12% 79% Pipefitters/Welders 66% 12% 78% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% harder than last year as hard as last year Source: AGC Workforce Survey, Aug. 2018

23 23 How firms are coping with workforce shortages Increased base pay 62% Engaged with career building program 48% Initiated/increased in house training 33% Interns 33% Craft staffing, exec search/peo firm 32% 0% 10% 20% 30% 40% 50% 60% 70% Source: AGC Workforce Survey, Aug. 2018

24 24 12 month change in producer price index for key inputs Diesel fuel 14% 44% 5% 16% Lumber & plywood Aluminum mill shapes 8% 18% 2% 6% Paving mixtures Copper & brass mill shapes 12% 12% 4% 10% Gypsum products Steel mill products 8% 14% 4% 3% Precast concrete 0% 10% 20% 30% 40% 50% 0% 10% 20% 30% 40% 50% July 2017 July 2018 July 2016 July 2017 Source: Bureau of Labor Statistics

25 25 Materials costs are rising faster than bid prices 9% 12 month % change, not seasonally adjusted: Jan July /17 7/18 8.1% 6% PPI for inputs to construction 12 month % change 3% Average hourly earnings for all construction employees 3.3% 2.9% 0% PPI for nonresidential building 3% Source: Bureau of Labor Statistics

26 summary, 2018 and 2019 forecast 2017 actual 7/17 7/ forecast 2019 forecast Total spending 4% 6% 4 7% 5 8% Private residential 12% 7% 6 9% 7 10% nonresidential 1% 3% 2 5% 3 6% Public 3% 8% 2 5% 1 4% Goods & services inputs PPI 4% 8% % 4 6% Employment cost index 2.7% 3.0%* 3 4% 4 5% * 2018Q2/2017Q2 Source: actuals: Census, BLS; forecasts: Author s estimates

27 AGC economic resources (email simonsonk@agc.

org) monthly press releases: spending; producer price indexes; national, state,

27 27 AGC economic resources ( The Data DIGest: weekly 1 page (subscribe at monthly press releases: spending; producer price indexes; national, state, metro employment with rankings yearly employment & outlook surveys, state and metro data, fact sheets: data

Construction Spending, Labor and Materials Outlook. NASFA Webinar March 15, 2018 Ken Simonson Chief Economist, AGC of America

Construction Spending, Labor and Materials Outlook NASFA Webinar March 15, 2018 Ken Simonson Chief Economist, AGC of America simonsonk@agc.org AGC members expectations for 2018 Net % who expect dollar