An upcoming US election, a financial crisis in Europe, volatile fuel costs, stubbornly high unemployment, a cloudy tax picture: The recession of 2008–2009 may be in the rearview mirror, but the road ahead clearly still has a few potholes the business community must navigate.
Yet amid all the uncertainty, construction appears to be gathering steam. Backlogs are up, and, as the AGC’s Ken Simonson shares in his article below, there are tentative signs of regional growth in one of the industries hit hardest by the recession.
Ken originally wrote the piece below for inclusion in our 2012 Idaho, Oregon, and Washington Construction Industry Salary Guide. For this edition of MA Now: Construction, he has graciously provided us with an updated and expanded version that covers more states and offers additional analysis. We appreciate his insights, and we hope you will too.
—Elaine Ervin, National Construction Practice Leader
A Fragile, Fragmentary Recovery
by Ken Simonson, Chief Economist, Associated General Contractors of America
The worst may be over for contractors in the western United States, but not by much. In six states, construction activity appears to have bottomed out sometime in 2011, but the recovery since then hasn’t benefited all metro areas or construction segments.
Nationally, construction spending touched bottom in February 2011 at a seasonally adjusted annual rate of $746 billion, according to the Census Bureau. (Seasonal adjustment removes monthly variations that are due to normal weather or holiday patterns in order to make underlying economic shifts clearer. Annual rate means monthly totals are multiplied by 12 to allow ready comparison with full-year figures.) By August 2012 spending had risen 12 percent, to $837 billion.
However, employment has been much slower to respond. The low point for spending came at nearly the same time as that for seasonally adjusted payroll employment: 5.46 million jobs in January 2011, according to the Bureau of Labor Statistics (BLS). But by September 2012 employment was only 1 percent higher, at 5.52 million jobs.
The disparity between growth in spending and payroll employment probably reflects uncertainty on the part of contractors about whether the expansion will last. For now, many firms are making do by having current employees work longer hours before committing to hiring.
The federal government doesn’t put out monthly construction spending figures by state, but two other data sources can provide insight into state and local conditions. Reed Construction Data and McGraw-Hill Construction separately collect information on the value of new project starts and sell tabulations based on geographic or other characteristics. Reed provided state totals for this publication. In addition, BLS posts monthly estimates of state and local construction employment. Taken together, these sources provide useful clues about the prospects for construction in each state.
However, two aspects of metro data should be kept in mind. First, it’s not seasonally adjusted, which means figures can be meaningfully compared for the same month in different years, but not across months. This is an important factor in the Northwest, which can be greatly affected by winter weather. And second, for most metros, BLS posts combined data for construction, mining, and logging to avoid disclosing information about industries with few employers.
The national figures suggest that state employment is a good proxy for identifying the timing, if not the magnitude, of turns in the market. (Turning points for spending and employment are similar on the high side as well: Spending peaked in March 2006 and employment a month later.) With this in mind, let’s take a look at some data on construction employment in the West.
Washington
In Washington, the value of construction starts in the first nine months of 2012 shows an across-the-board rebound compared with the same span in 2011: total starts jumped 21 percent, with residential starts up 23 percent; nonresidential building starts, 22 percent; and civil (heavy) construction, 14 percent. Construction employment hit a low of 135,500 in June 2011 and recovered modestly, to 140,400 in August 2012, 3.6 percent above the low point.
Results varied greatly by metro area, and even within a single area. In Seattle-Bellevue-Everett—part of the state’s largest market—construction employment began rising on a year-over-year basis in November 2011. By August 2012 employment was higher by 4,400, or 7 percent, than it was a year earlier. Just to the south, in Tacoma, monthly construction employment in 2012 was alternating between higher and lower than a year before.
For the state’s other metro areas, construction, mining, and logging employment data is reported on a combined basis. In Spokane combined employment declined every month in 2011 and the first half of 2012 from the year-ago month. Kennewick-Pasco-Richland had a 10 percent jump in combined employment throughout 2011, with smaller additional year-over-year gains in January through July 2012. Employment in Bellingham, Bremerton-Silverdale, Longview, Olympia, Wenatchee–East Wenatchee, and Yakima showed little change.
The Seattle area has been helped by a number of forces. Major employers have been hiring and expanding or building new factories and offices. Huge transportation infrastructure projects have begun to gear up. Port activity has grown. All these trends should continue to boost construction around Puget Sound in 2013.
Markets beyond the Cascades will be more at the mercy of agricultural conditions, demand from Pacific Rim nations, and the federal budget for ongoing Columbia River basin and Hancock Reservation projects. Unfortunately, the prospects for each of these factors remain shaky for now. Thus, Washington is likely to continue experiencing a lopsided construction recovery into 2013, although the 21 percent rise in year-to-date starts suggests the coming year will be positive overall.
Oregon
Starts data was much more subdued for Oregon. Reed’s estimate for the value of total starts edged up just 5 percent from January through September 2011 to the same span in 2012, despite a 25 percent pickup in residential starts. Those gains were largely offset by decreases of 8 percent in nonresidential building starts and 1 percent in civil starts.
Construction employment showed little movement between late 2009 and mid-2012. Employment totaling 70,300 in August 2012 was up a modest 2.3 percent from a year earlier and 5.6 percent from the low set in December 2010 but remained down one-third from the all-time high in July 2007. Job growth has been concentrated in nonresidential building construction and specialty trade contractors, while 2012 monthly employment has dropped relative to 2011 levels in residential building and civil construction.
Geographically, growth has occurred overwhelmingly in the Portland-Vancouver-Hillsboro area (including Clark and Skamania counties in Washington). Construction employment on a year-over-year comparison rose every month since February 2011 and totaled 53,600 in August 2012, an increase of 4,700 (10 percent) from the previous July. The gains have been concentrated in residential building and specialty trades contractors.
Construction employment remained roughly flat in 2011 and the first half of 2012 in Medford, as did combined construction, mining, and logging employment in Bend and Corvallis. Year-over-year construction employment dropped sharply in the Salem metro area. And after lagging 2011 levels for most of the year, construction employment pulled ahead of the year-ago level in August in the Eugene-Springfield area.
The big driver for employment in the Portland metro area is the Intel complex in Hillsboro, which is also attracting plant and warehouse investment by suppliers. That work will sustain employment well into 2013, but it’s not clear if the construction headcount will keep rising. A prospective massive investment in a natural gas pipeline, liquefaction train, and export terminal in southwest Oregon could significantly boost employment, although the specialized nature of those projects may mean most workers are brought in from elsewhere.
Other potential contributors to construction hiring include a Columbia River bridge in Portland, hospital and higher education projects, and additional data centers in the eastern half of the state. But uncertainty over federal tax credits for renewable energy may doom investment in additional wind and solar generation facilities. Overall, Oregon appears to be heading for modest construction growth at best.
Idaho
Idaho recorded strong growth in starts in the first seven months of 2012. Compared with January–September 2011, total starts climbed 24 percent, with residential rising 34 percent and civil construction leaping 66 percent, but nonresidential plunged 23 percent.
Statewide construction employment hadn’t reflected the impact of the starts advance through mid-2012. Indeed, employment remained virtually unchanged since mid-2010, totaling 29,600 in August 2012—44 percent less than in the record month of June 2006.
Nonresidential building contractors have added employees, offsetting a similar decline in residential construction. Civil construction has been flat, while specialty trade employment has fluctuated.
In the state’s largest metro area, Boise City–Nampa, combined construction, mining, and logging employment stalled in the spring and summer after rising steadily from year-ago levels in late 2011 and early 2012. Specialty trade contractors account for the bulk of the hiring there. Civil construction also rose, while building construction employment was unchanged.
Construction employment in Coeur d’Alene rose modestly on a year-over-year basis in most of late 2011 and the first eight months of 2012, reversing a four-year downturn. In contrast, Idaho Falls and Pocatello experienced year-over-year job losses in construction, mining, and logging in most recent months.
Going forward, Idaho should post some growth, based on the largely positive year-to-date construction starts data. But the state remains vulnerable because it’s so dependent on agriculture, natural resources, and federal spending.
California
The Golden State achieved a 5 percent increase in construction starts in the first nine months of 2012 compared with the same period a year earlier. Civil starts leaped 33 percent, and residential starts grew 15 percent, while nonresidential starts retreated 11 percent. Employment finally bottomed out in June 2011 but has grown only fitfully since then. However, employment gains have accelerated recently, reaching 580,800 in August 2012, a gain of 33,500, or 6 percent, from the low point.
The state had half of the nation’s top 10 metros for construction employment gains between August 2011 and August 2012. Tiny Yuba City was number one, with a 24 percent increase in combined construction, mining, and logging employment. Construction employment climbed 17 percent in Bakersfield-Delano and 12 percent in San Jose–Sunnyvale–Santa Clara, while combined employment grew 15 percent in El Centro and 12 percent in San Luis Obispo. Meanwhile, the Los Angeles–Long Beach–Glendale division of the greater Los Angeles metro area had the largest numerical increase in construction employment of any metro: 8,600, or 8 percent.
These metros differ in almost every characteristic: size, location, and industry base, for instance. The diversity shows that California has multiple drivers for its construction rebound despite severe state and municipal budget problems that have driven some cities into bankruptcy. This dichotomy will continue to shape construction in 2013 as some parts of the state heal rapidly from the slump and others slip further.
Arizona
Construction starts in the first nine months of 2012 showed a healthy 16 percent pickup from the same period in 2011. As elsewhere, residential starts provided the big lift, with a 48 percent rise, followed by a 5 percent gain in nonresidential starts and a 16 percent drop in civil starts. Construction employment rose more than 10 percent from the spring of 2011 to mid-2012, but growth stalled from April to August 2012.
The Phoenix-Mesa-Glendale metro area, which accounts for two-thirds of Arizona’s construction employment, had a 7 percent increase from August 2011 to August 2012, while Tucson added 2 percent to its payrolls. Combined construction, mining, and logging employment expanded 5 percent in Yuma and held steady in Flagstaff, Prescott, and Lake Havasu City–Kingman.
Phoenix appears to be recovering very strongly from the real estate frenzy and bust of the last decade. The metro area is attracting more employers and residents, while infrastructure spending for the airport, highways, transit, and Arizona State University are helping a variety of contractors. But growth prospects are less certain for the state’s smaller metro areas.
New Mexico
Like Arizona, New Mexico has experienced a 16 percent rise in total construction starts for the first nine months of 2012 compared with January–September 2011. But the mix is quite different: a whopping 148 percent leap in civil construction starts, a 13 percent increase in residential starts, and a 38 percent dive in nonresidential starts. The rise in starts has yet to show up in employment, however: The August 2012 total, 39,600, was the lowest in 19 years and 8 percent below year-ago levels.
The employment losses occurred in all three of the state’s meto areas but were concentrated in the biggest. Combined construction, mining, and logging employment tumbled 14 percent in Albuquerque from August 2011 to August 2012. The decline amounted to 7 percent in Santa Fe and 3 percent in Las Cruces.
For 2013, New Mexico faces the prospect of further cuts in federal spending on military bases, research laboratories, and public lands—all important sources of income and construction funding for the state. Oil and gas development may provide a boost to construction in a few areas, but the state’s outlook is much less sunny than elsewhere in the West.
Conclusion
Construction spending and employment have risen from their low points in all the Western states except New Mexico. Based on recent reports on housing starts and residential building permits, there should be a strong pickup in residential construction throughout the region in 2013.
Private nonresidential construction will also have pockets of strength. But public construction appears headed for further shrinkage, which will wreak hardship on many contractors. Thus, the outlook is for another year of fragile—and fragmentary—recovery.
(Click image for larger view.)
Ken Simonson delivers frequent presentations, gives interviews to the media, and publishes the Daily DIGest, his weekly one-page summary of industry economic news.
Take our insights to Go
Articles, videos, and other Moss Adams resources are also available on your mobile device. Get the free app for iOS and Android.
The material appearing in this communication is for informational purposes only and should not be construed as legal, accounting, or tax advice or opinion provided by Moss Adams LLP. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship. Although these materials have been prepared by professionals, the user should not substitute these materials for professional services and should seek advice from an independent advisor before acting on any information presented. Moss Adams LLP assumes no obligation to provide notification of changes in tax laws or other factors that could affect the information provided.