< Previous22 The VOICE ● Issue 4, 2019 ●●● Pessimistic Predictions, OR Optimistic Outlook Continued -2.7% -6.6% 0.1% -15.0% -10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 May-19 Jul-19 Total Construction SpendingResidentialNonresidential out with laments regarding an incapacity to secure electricians, heating and air conditioning workers, glaziers, roofers, superintendents, or estimators. Somehow, construction firms have managed to continue to find net new people, though undoubtedly in many instances the newcomers require substantial training. Among experienced workers, wages continue to rise rapidly, helping to drive up the overall cost of delivering construction services even in the context of generally well-behaved construction materials prices. See Exhibit 3. While construction employment growth has persisted, nonresidential construction spending growth has become decidedly erratic. In particular, Exhibit 4. Construction Spending Year-over-Year % Change, July 2015 through July 2019. Source: U.S. Census Bureau. -40 -20 0 20 40 60 80 N et Ch an ge s (0 00 s) Aug. 2019: +14K Exhibit 3. Construction Employment, August 2015 through August 2019. Source: U.S. Bureau of Labor Statistics. construction spending in a number of private categories has waned, perhaps because of rising concerns regarding overbuilding in certain segments. Among these segments are office and lodging, both of which have experienced chunky increases in spending over the last five years, recent weakness notwithstanding. Weakness in a handful of private construction segments has resulted in the trends observable in Exhibit 4. Meanwhile, a dramatic decrease in mortgage rates since late last year has helped to produce more residential construction activity, with both multifamily and single-family housing activity picking up recently. Still, residential construction was down nearly seven percent from a year-ago, through July 2019. One of the sources of strength for the U.S. economy has been a pickup in infrastructure spending. True, the federal government has yet to fashion a full- fledged infrastructure plan for the nation. In fact, the nation’s Highway Trust Fund (HTF) is set for insolvency by 2021, absent Congressional action. The most recent national effort regarding the HTF is scheduled for expiration in 2021. There is hope, however. The Senate Committee on Environment and Public Works recently voted unanimously on a five-year $287 billion reauthorization bill, with almost all the funding going towards the nation’s roads and bridges. In the interim, both state and local governments have come to the rescue, supported by rising collections of income, sales, and property taxes as the U.S. economic expansion enters an unprecedented 11th year. A number of key construction segments have benefitted as a result, including water/sewer, transportation, and highway/street. See Exhibit 5. Input prices, how low will they go? There was a time when construction industry leaders were deeply concerned about rising materials prices. While many remain continuously vigilant regarding any factor that can influence the cost of delivering construction services and profit margins, materials prices have generally been benign of late. Indeed, construction input prices fell 0.6 percent in August 2019 according to the Bureau of Labor Statistics. On a year-over-year There is hope, however. The Senate Committee on Environment and Public Works recently voted unanimously on a five-year $287 billion reauthorization bill, with almost all the funding going towards the nation’s roads and bridges. The Construction Users Roundtable 23 ON THE COVER basis, prices are down 0.9 percent. Nonresidential construction input prices were down 0.4 percent for the month, and 0.4 percent for the year. Falling energy prices have been largely responsible. The largest annual declines were in natural gas (-33.3 percent), unprocessed energy materials (-19.1 percent), and crude petroleum (-15.7 percent). While the assault on Saudi oil facilities has produced considerable uncertainty regarding the future of energy prices, oil prices began to moderate only days after the attack. Other categories of materials experiencing significant declines in price, according to government data, are softwood lumber (-11.7 percent), iron and steel (-10.7 percent), and steel mill products (-10.6 percent). See Exhibit 6. A number of factors have conspired to produce lower materials prices, including a weakening global economy. For instance, Latin American economies are expected to collectively expand less than one percent this year. China registered its lowest economic growth last year since 1990. A number of key nations are flirting with recession; including Germany, South Korea, and Russia. All of this has led to weaker demand for certain key commodities, which in turn has generated lower prices in the United States. A strong U.S. dollar has helped reinforce these dynamics. Regionally, job growth tends to be meaningfully more rapid in the South and the West, with the implication being that this is where construction activity is most likely to remain robust. The Architecture Billings Index (ABI) has begun to hint at a slowdown in construction spending in those categories of construction involving architects; including office, lodging, and commercial categories. Back in 2017, all four regions were associated with a reading in excess of 50, indicating that architects were generally getting busier from month-to- month. But since that time, data readings have steadily deteriorated. By July 2019, only the West was associated with a reading above 50. The South generated an ABI reading of 48.3, only the third time in the last three years that the region was associated with a sub-50 indication. The Northeast is associated with five consecutive sub-50 readings, signifying that the average architect has been getting less busy for nearly half a year. Looking ahead, it’s not an easy projection Economists have been predicting the next economic recession for years now. The current period is especially difficult to One could argue that the emerging softness in job creation is not due to falling demand, but to the dwindling supply of human capital. As of writing this article, there are still 7.22 million unfilled, available jobs in America. Exhibit 5. Nonresidential Spending Growth, Millions of Dollars, Seasonally Adjusted Annual Rate July 2019 June 2019 July 2018 1-Month Per- cent Change 12-Month Per- cent Change Nonresidential $776,017 $778,511 $775,629 -0.3 percent0.1 percent Water supply $17,338 $16,570 $16,109 4.6 percent7.6 percent Conservation and development $9,722 $9,341 $8,972 4.1 percent8.4 percent Sewage and waste disposal $27,848 $27,253 $23,358 2.2 percent19.2 percent Manufacturing$72,491 $71,149 $70,142 1.9 percent3.3 percent Public safety$10,500 $10,327 $9,400 1.7 percent11.7 percent Health care $44,761 $44,278 $42,429 1.1 percent5.5 percent Educational$90,845 $89,878 $95,231 1.1 percent-4.6 percent Power$99,518 $99,235 $99,466 0.3 percent0.1 percent Office$78,943 $78,862 $74,498 0.1 percent6.0 percent Communication$22,921 $23,122 $24,103 -0.9 percent-4.9 percent Transportation $56,179 $56,755 $53,395 -1.0 percent5.2 percent Lodging$34,663 $35,444 $32,313 -2.2 percent7.3 percent Amusement and recreation$27,802 $28,468 $29,027 -2.3 percent-4.2 percent Highway and street $97,314 $100,037 $95,080 -2.7 percent2.3 percent Commercial $82,552 $85,070 $98,894 -3.0 percent-16.5 percent Religious$2,622 $2,722 $3,212 -3.7 percent-18.4 percent Source: U.S. Census Bureau continued on page 2424 The VOICE ● Issue 4, 2019 ●●● Pessimistic Predictions, OR Optimistic Outlook Continued forecast, given the enormous influence of uncertain policymaking. Tariffs announced one month can be postponed the next. While much of the focus has been on Sino-U.S. trade disputes recently, there are also conflicts involving America and the European Union, as well as India. Brexit also becomes increasingly perilous, with British governments continuously on the precipice of being undone. Though the Federal Reserve have cut rates twice in the span of three months, that won’t likely solve the issues underlying the economy. The problem in the U.S. has not excessively elevated borrowing costs. The problem in America is a dramatic increase in the levels of uncertainty concerning households and businesses. When the current administration in Washington, D.C. entered the fray, uncertainty facing many businesses declined, regulations were withdrawn, corporate earnings surged, markets rose, employment growth accelerated, and consumer spending took off. Today, the situation is far different, with Americans struggling to understand the impact of trade disputes, circumstances pertaining to Iran, and the consequences of their own expanding indebtedness. All that is known is that there will be elections in the U.S. next year, which will further expand uncertainty. From a policymaking perspective, there is a big difference between Donald Trump and Elizabeth Warren. There is a big difference between Donald Trump and Kamala Harris. Indeed, there is a big difference between Donald Trump and any conceivable Democratic nominee. For business, this means an uncertain outlook regarding the future of health insurance, defense contracting, trade relations with China and other partners, taxes, and of course regulation. For households, this translates into uncertainty regarding federal taxes, state and local tax deductions, incentives to purchase electric vehicles, social assistance, payments to farmers, etc. Even state and local government policymakers face growing uncertainty regarding future federal spending on infrastructure and social programs like Medicaid. Ultimately, the heightened level of uncertainty could induce many economic actors to adopt a wait-and-see attitude, further reducing economic activity in the context of an already rapidly softening global economic environment. An inverted yield curve and other indications have been flashing yellow for months. Conclusion: 2019 will be fondly remembered by many economic actors, but 2020 may not be. ● Anirban Basu is Chairman & CEO, Sage Policy Group, Inc. Anirban has presented at several CURT events and is best known for his witty take on the economy. He has twice been recognized as one of Maryland’s 50 most influential people, and has also been named one of the Baltimore’s region’s 20 most power business leaders. Exhibit 6. Producer Price Index, August 2019 Aug. 2019 July 2019 Aug. 2018 1-Month Percent Change 12-Month Percent Change Inputs to Construction232.4233.8234.5-0.6 percent-0.9 percent Inputs to Nonresidential Construction117.2117.7117.7-0.4 percent-0.4 percent Plumbing Fixtures and Fittings282.5281.5269.60.4 percent4.8 percent Fabricated Structural Metal Products 240.7238.4236.91.0 percent1.6 percent Iron and Steel218.7217.3244.80.6 percent-10.7 percent Steel Mill Products198.7201.3222.3-1.3 percent-10.6 percent Nonferrous Wire and Cable245.5246.5253.0-0.4 percent-3.0 percent Softwood Lumber212.9213.9241.0-0.5 percent-11.7 percent Concrete Products275.2274.0264.70.4 percent4.0 percent Prepared Asphalt, Tar Roofing & Siding Products 245.0244.3236.20.3 percent3.7 percent Crude Petroleum159.6162.6189.3-1.8 percent-15.7 percent Natural Gas69.472.7104.0-4.5 percent-33.3 percent Unprocessed Energy Materials135.8138.9167.8-2.2 percent-19.1 percent Source: U.S. Bureau of Labor Statistics Ultimately, the heightened level of uncertainty could induce many economic actors to adopt a wait- and-see attitude, further reducing economic activity in the context of an already rapidly softening global economic environment.The Construction Users Roundtable 27 FEA TURE Workforce 2030 Taking a Deep WWhile the U.S. remains a world leader in driving and developing construction innovation, the availability of craft professionals needed to build, operate, and maintain projects throughout their lifecycle has been in decline for decades, to where it now poses a significant risk; not only to the health of the construction industry, but for the security of the United States as a whole. Whether it is developing clean energy, rebuilding the U.S. infrastructure system, or expanding a STEM economy, so many of this nation’s challenges will demand a craft professional workforce to build and maintain these systems. And if that workforce supply is found lacking, the nation’s economy and environment will suffer as the construction industry is forced to use outdated and inefficient systems to get the job done. Even though all industrial sectors that employ craft-type occupations – those that involve complex work, manual dexterity, and a tacit knowledge that falls outside the range of a four-year university degree – are tremendously affected by the decline of workforce availability, the construction industry is more impacted than most. Construction’s supply of available craft professionals is aging at a rate three times the national average for the entire workforce and, by 2030 (only 11 years away!), it is expected that approximately 40 percent of the current construction craft workforce will be retired. “One of our industry partners noted that in the 70s and 80s he would complain about their craft workforce by saying that, ‘we need 50 pipefitters and we got 50 pipefitters, but only 40 of them are qualified,’” says Dr. Tim Taylor, University of Kentucky College of Engineering. “Now he says, ‘We need 50 pipefitters and we got 35 pipefitters, and only a handful of them are really qualified.’” It is painfully evident that the current U.S. workforce development system must be reworked, enhanced, and expanded upon in order to Dive into Labor: continued on page 2828 The VOICE ● Issue 4, 2019 ●●● Taking a Deep Dive into Labor Continued properly address the challenge of meeting workforce demand. Maintaining the status quo will not suffice. Doing nothing will only risk the workforce gap widening, particularly as trade professionals continue to age out of the industry in accelerating numbers. “In the years ahead, we are going to see shortages at all levels of the construction industry, from executives to front-line managers to craft professionals, because we are in the midst of losing a generation of workers to retirement at the same time business is getting busier,” says Don Whyte, CEO of the National Center for Construction Education and Research (NCCER). “The loss of the Baby Boomers, which is about 20 to 30 percent of our workforce, is a wildcard in the current state of our industry that we really haven’t seen happen before.” In 2015, the Construction Industry Institute (CII) released the results of RT-318, Is There a Demographic Labor Cliff That Will Affect Project Performance?, which uncovered several fundamental societal changes that are now affecting the craft labor market beyond traditional supply and demand dynamics. In response, CII in 2018, with assistance from NCCER, CURT, and the Ironworker Management Progressive Action Cooperative Trust (IMPACT), released the policy paper RT-335, Improving the U.S. Workforce Development System and laid out several key policy changes needed to adequately address the pressing workforce issues of today. “According to the Associated General Contractors (AGC), more than 80 percent of firms are currently having trouble finding craft workers, and more than 70 percent of those firms believe that this problem will only become more difficult over time,” says Dr. Daniel Oliveira, Associate Director for Funded Studies, CII. “With our research we are really trying to decide where we, as an industry, want to be in the future and then talk about how we get there. If we simply continue to react to the issues, we will find ourselves in a very different place than if we have a strategic plan going forward.” Within the construction industry today, there is a considerable amount of risk associated with a project – particularly as it relates to mega-scale projects; many are unsuccessful in regard to staying within budget and schedule. As such, one of the first steps in addressing the myriad of issues facing the availability of skilled trades will be to have construction owners step up their efforts in developing methods to better measure performance and involvement in workforce development when awarding construction contracts. “What we have typically done as an industry is focus on the symptoms of the problem, such as absenteeism, low productivity, or safety challenges; all of those – and others – are tangible manifestations of a more systemic underlying issue in the labor market,” says Daniel Groves, Director at CURT and CEO at Construction Labor Market Analyzer (CLMA). “We are confident that if the owner community were to show real leadership on the issue of workforce development, we would be able to change course.” And, like safety prequalification was able to turn around the construction industry’s abysmal safety record in the late 80s and 90s, the same model can be applied to workforce development; there just needs to be a strong business case for doing so. Fortunately, CII’s RT-231, Construction Industry Craft Training in the United States and Canada, demonstrated that whenever a contractor is evaluated in regard to workforce development and pushed to invest at least one percent of the project labor budget back into workforce development and training, it tends to dramatically improve the project outcome. “The research shows that, for each dollar invested, there was a return of up to three dollars or more,” says Groves. “On some projects, we see some modelling that indicates the ROI on a single project can be as high as five dollars for every dollar invested. And if everybody is investing in the workforce, the ROI goes beyond seven dollars on average. So, there is a real business case to be made for the owner’s leadership, and why demanding greater investment in workforce development is the right thing to do. We believe this level of leadership will be needed to change the marketplace.” CII and its partners also identified areas where industry still needs to do a better job at establishing and strengthening the awareness of career opportunities and benefits within the skilled trades. One of the largest challenges in attracting new workers into the fold is that – generally speaking – the public does not currently value a career in construction; or at least not to the degree it once did. “In the past, the family-sustaining wages available in construction would attract individuals to the industry and our society valued these traditional jobs in the skilled trades,” says Dr. Taylor. “Now, the message is that, without a four-year college degree, your career is not valuable. This has affected many industries, not just construction, and it is an issue that cannot be solved by simply offering higher wages alone.” Over the last 30 years, the U.S. education system has purposely steered students away from vocational training into four-year colleges and universities; to the detriment of present-day job market realities. When breaking down the numbers, there are more students earning university degrees today than there are careers that demand university degrees, thereby creating an imbalance. The majority of available jobs across the U.S. economy currently require career and technical education (CTE) and associated certification. “And while it may be true overall that individuals with degrees tend to earn more than an individual without a degree, you only need to look within the data to understand that jobs like certified craft professionals earn much more than many types of jobs requiring a degree,” says Dr. Paul Goodrum, Professor in Construction Engineering and Management at the University of Colorado Boulder. “In addition, the mounting student debt that is carried by students and their families are forcing many individuals to re-examine Maintaining the status quo will not suffice. Doing nothing will only risk the workforce gap widening, particularly as trade professionals continue to age out of the industry in accelerating numbers.The Construction Users Roundtable 29 FEA TURE career paths to consider industry-based training programs that can better support the development of future craft professional.” Because of this, it is vitally important that industry takes steps to re-establish itself as a source of career pride and elevate the public’s awareness of construction’s contributions to society. Part of this will entail reaching future workers and their families while they are in high school, or even younger. Research has shown that when a young person receives at least one year of exposure to working in the construction industry, they are 90 percent more likely to remain in the industry. Yet, in spite of this knowledge, it remains very difficult today for minors to even step foot on a job site. “NCCER’s Build Your Future campaign is targeted directly at this age group, as well as at parents, teachers, and other influencers in these young peoples’ lives,” says Jennifer Wilkerson, Director, Marketing at NCCER. “Millennials were – and still are – certainly a huge focus of ours, but Gen Z (15 to 25 years old) is going to be extremely important when you consider the rate of retirement coupled with the fact that young people just aren’t considering construction; something that we have been seeing for a while.” It is then paramount that the U.S. makes a serious effort to revitalize its work-based learning programs, and does so at a younger age; introducing career opportunities in CTE fields to students in junior high and high school. Without this early introduction to the opportunities and benefits in industry, there is sure to be a poor transition among high school students entering into more advanced construction craft training programs. “The key will be getting industry more deeply involved with CTE programming and providing other opportunities – such as those offered by NCCER – to attract young people into the industry and then deliver the training to ensure that they are successful and are encouraged to remain,” says NCCER President, Boyd Worsham. “And as this economy continues to grow and infrastructure bills get passed, we will continue teetering on the edge of not having enough folks to build what’s available to be built out there unless we find ways to attract and retain new talent into our industry.” In addition to recruiting the nation’s youth, the construction industry also needs to begin making serious in-roads in improving the overall diversity of its craft professional workforce; particularly as it relates to attracting more women, minorities, and veterans into the fold. And while there have been significant initiatives taken to increasing the number of these underrepresented groups in construction craft training programs, industry and its leadership still need to work at doing a better job of recruiting/retaining these future professionals by presenting improved worksite conditions free of harassment, as well as other incentives. “We would love to see more of these under-represented populations – such as females and minorities – in our industry, but providing them great career opportunities will certainly take some accommodation in order to better meet their needs,” says Worsham. “If we don’t learn to adjust a little bit, their retention will be an uphill battle.” continued on page 30Next >