Construction Forecast: Construction Demand Expected to Grow, Causing Labor Issues

Caitlyn Freitas

Caitlyn Freitas is the Associate Editor for NIA. Her responsibilities include curating, editing, and writing content for Insulation Outlook; working on marketing and outreach pieces; and editing all NIA publications. She can be reached at cfreitas@insulation.org.

June 1, 2014

The National
Insulation Association (NIA) recently
interviewed Bernie Markstein, U.S. Chief
Economist for Reed Construction. Dr.
Markstein has extensive experience in
analyzing and forecasting commercial
construction activity. He has a Bachelor
of the Arts in Economics from Brown
University and a Doctorate in Economics
from Yale University. The following
interview covers his thoughts on where
the construction industry is headed and
the factors that will affect the
economic recovery.

As we move deeper into the second
quarter of 2014, questions remain about
the economic recovery in general and how
the construction industry will fare.
Most indicators predict that the economy
will continue to recover and the
construction industry will also improve,
though at a measured pace. Part of the
slow pace of the recovery has to do with
uncertainty about where government
spending and taxes were headed in 2013.
This uncertainty was a drag on
investment and, consequently, on
nonresidential
construction—despite historically
low interest rates. Simple government
appropriations did not occur, and there
were a series of continuing resolutions
until the appropriations bill for the
current fiscal year—which runs
from October 1, 2013 through September
30, 2014—was passed and signed
into law in January 2014.

Looking Back

The government shutdown in October
2013 also had a direct impact on a
number of government construction
projects, delaying the start of many
projects and in some cases stopping them
altogether. Following the government
shutdown and the eventual passage of an
appropriations bill, there was also the
threat of hitting the government debt
ceiling. If the debt ceiling was
reached—which, at the time, was
expected to occur in spring of this
year—there would have been a wider
shutdown of government. The Treasury
would have been forced to delay paying
various federal obligations, such as
Social Security, Medicare, federal
payrolls, payments to contractors, tax
refunds, and debt payments (a technical
default of U.S. government debt).
Fortunately, Congress passed legislation
suspending the debt ceiling until March
of next year. Although the debt ceiling
issue was ultimately avoided, this
created great uncertainty at the time
and increased the reluctance of
businesses to invest in an already
uncertain economic environment with
relatively weak demand. More directly,
the weak economic recovery was hit with
sequestration—across-the-board
cuts in federal funding for most of the
federal government, which had a
significant effect on construction
projects.

The
Recovery

Thankfully, we are now recovering
from these events; some funding has been
restored, and no new cuts are
anticipated at this time. It is still
necessary for Congress to act on
legislation dealing with funding for
construction projects. Without such
multi-year funding, long-term planning,
and contracts, the construction recovery
will continue at a slower pace.
Essentially, however, we are in a quiet
period with government funding in place
for this fiscal year and no immediate
threat from the debt ceiling. This has
removed some of the uncertainty for
business planning and investment.

Other factors affecting construction
include a long and difficult
winter—even now, parts of the
country are just beginning to see the
signs of spring. March total
construction spending was only up 0.2%
from February, though it looks like many
of the projects that were delayed in the
first quarter will take place in the
second quarter.

Employment

The forecasted overall employment
numbers for May look positive, and
growth is expected to continue in the
coming month. This year, we are on track
to move past the pre-recession peak in
employment, which we are currently
100,000 jobs below. Ideally, we would be
moving far beyond a peak from several
years ago, but the fact that we are on
track to reach the pre-recession peak is
a good sign. Unemployment numbers are
also decreasing—though this may be
skewed by the fact that some people have
given up on their search for employment.
In the short term, it would be a good
sign to see the unemployment rate
temporarily go up—this would mean
confidence in the economy was growing
and people would rejoin the ranks of the
unemployed (hopefully temporarily) while
looking for work. A full and robust
economy should see the addition of
between 400,000–500,000 jobs a
month, but even the addition of
200,000–300,000 jobs a month would
be a good start. U.S. Census data
measuring the past 12 months found that,
on average, approximately 190,000 jobs
were added per month, with 288,000 jobs
added in April.

Construction employment has been on
the rise, and we saw the addition of
32,000 construction workers in April,
which is a positive step towards
recovery. For the entire year, we have
added close to 190,000 workers. The
construction unemployment rate, which
was at 13.2% last year, is now down to
9.4%, and projections predict the
number will continue to decrease. Parts
of the construction recovery have been
by sector, with a large portion of
additional jobs being added to the
single-family and multifamily
residential building sector, with
overall residential construction
spending expected to be 16% higher than
in 2013. Robert Murray, McGraw Hill
Construction’s Vice President of
Economic Affairs sees “2014 as
another year of measured expansion for
the construction industry,” with
construction starts rising 9% to $555.3
billion.1

Nonresidential
Building

The nonresidential building sector
has had a more difficult recovery, with
nonresidential construction spending
falling for the past 5 months. While
overall spending is 3.5% higher than the
same period a year ago, the recent drop
in spending is still a concern. Part of
the decrease may have to do with the
weather, but it is more likely tied to
other aspects of the economic recovery.
There has been an absence of funding for
buildings such as hospitals and schools,
which depend largely on appropriations
from the government. Education
construction fell for the fifth month
this year, and is 5.5% lower than it was
this time last year. Health-care
construction is also down 6.5% from last
year. Other commercial (mainly retail)
nonresidential building has improved, up
8.7% from this period last year, with
office construction up 12%, and lodging
up 33.7%. While these latter projects
can be funded privately, there has been
a hesitancy on the part of government to
fund the types of institutional projects
that would have further aided the
construction recovery by spurring
institutional construction such as
educational and health-care facilities.
Overall, however, the forecast is
positive, with U.S. nonresidential
building construction spending in 2014
predicted to increase 4.3% over 2013,
and 2015 spending expected to increase
8.6% over 2014. To see the construction
forecast for each sector, reference the
graphs on pages 24–25. The
breakdown of projects by state is
available in the charts to the left.

Factors Influencing the
Recovery

Infrastructure repairs are a huge
category that has the potential to spur
many construction projects and add
construction jobs. Sewer and water
treatment facilities desperately need
updates, and although the forecast does
have spending going up for water and
sewer projects in 2014–2015, this
increase will not be sufficient to
offset all the repairs that are needed.
The power sector will also be in need of
updates, and we see spending going up
for this in 2014, and then more
significantly in 2015. Overall, the main
issue that holds back spending is the
conflict in government over federal
spending. With different political
parties in disagreement over proper
taxation, and the associated
appropriations for construction projects
like these, the outcome for these
projects remains to be seen.

Another development that holds
opportunity for the construction
industry is the “reshoring”
of manufacturing into the United States.
Due to a variety of factors including
reliable infrastructure, high worker
productivity, shorter distance between
manufacturer and selling market, and
high availability of energy, we are
seeing some American companies coming
back to the United States, as well as
other foreign companies showing interest
in building their factories here. This
could bode well for a variety of
construction industries as demand for
manufacturing buildings increases.

Although the outlook for the
construction industry as a whole is
positive, it is likely that power, water
and sewer, and education will continue
to struggle. Funding for educational
facilities in particular has been in
reverse for a number of years and is
expected to bottom out next year, with
the potential for improvement in 2016.
Overall, however, the forecasted growth
for both residential and nonresidential
building is looking up, which will
increase demand for insulation and for
the services of mechanical engineers.

SIDEBARS

Manpower Issues

The shortage of skilled workers is
going to be one of the most significant
issues as the industry recovers and
demand for skilled workers increases
across various construction sectors.
During the recession, many workers left
the construction industry, which is now
facing a deficit of workers with the
skills the industry needs. Brian
Turmail, Executive Director of Public
Affairs for the Associated General
Contractors (AGC) of America, said in
regard to this issue: “Somewhere
in recent decades, our country made a
collective decision that everyone should
attend college. The robust workforce and
technical education programs that once
existed in our high schools disappeared
in favor of college-track programs. When
we lost this opportunity to show
students what working in construction is
really like and the opportunities out
there, we lost our pool of skilled
workers, as well.”2

This issue is also complicated by the
fact that certain companies may be
reluctant to hire workers who have been
out of work for a significant period of
time—even if they are qualified.
There may also be an unwillingness to
hire older workers, though they likely
have the skill sets and knowledge that
companies need. In response to this
shortage, there have been some efforts
to create the education needed to
generate more skilled workers,
particularly at community colleges.
Labor unions can also be a potential
source of education. It may prove
worthwhile for companies to join
together and create consortiums to train
workers. Joining together has the
benefit of diluting the cost, and could
provide the infusion of skilled workers
that the sector desperately needs. Of
course, any consortium must be sure to
avoid violating any anti-trust laws,
which is easily accomplished with proper
planning. Though there will be
difficulties and growth may at times be
slow, the construction industry is
forecasted to recover in the coming
years—it is crucial that we
develop the workforce to ensure the
industry’s growth is not hindered.

Developing a New Skilled
Workforce

There have been some efforts to
create the education needed to develop
the skilled workers that the
construction industry needs. San
Antonio, Texas in particular has
responded to this need by establishing
the Construction Careers Academy (CCA),
which offers 4 “strands”
that aim to give students the education
they need for careers in architecture,
construction management, engineering,
and the trades. Students may specialize
in carpentry, HVAC, pipefitting,
plumbing, welding, or electrical work.
It has become a very popular program,
and 505 eighth-grade students have
applied for the 159 available spots in
the upcoming freshman class. In total,
the program has 475 students.
3 Educational programs like
the CCA can play a tremendous role in
creating the workforce that will be
needed as the construction industry
continues to recover and demand
continues to grow.

Other groups have also been investing
in educational programs. The Associated
General Contractors (AGC) of St. Louis
created the Construction Careers Charter
High School, which was the first
publicly funded high school for
construction in the United States.
Another organization, the Associated
Builders and Contractors (ABC), Central
Ohio chapter, created a public charter
high school for construction. This
4-year program uses a combination of
online courses, classroom learning, and
on-the-job training.

Other states should use these
programs as models to start their own
educational programs. By proactively
creating these programs, we can prevent
future worker shortages down the road.
4

1. Andrea Wells,
“Construction Obstruction”
Insurance Journal 92, no. 1 (2014).

http://tinyurl.com/pn3nvh8

2. Kelly Davidson,
“Industry Seeks Answers to
Increasing Labor Shortages”
ENR.com (2014).

http://tinyurl.com/l2kc7t7

3. Kelly Davidson,
“Industry Seeks Answers to
Increasing Labor Shortages”
ENR.com (2014).

http://tinyurl.com/l2kc7t7

4. Kelly Davidson,
“Industry Seeks Answers to
Increasing Labor Shortages”
ENR.com (2014).

http://tinyurl.com/l2kc7t7