Will the impending U.S. presidential election be another headwind for an already slowing economy?
On this episode of The Dirt, Ken Simonson, chief economist for the Associated General Contractors of America tells host Bryan Furnace where the election will make “a big difference” for construction contractors – and where it won’t.
“A lot of things do depend on who is in office, both in the White House and who they appoint to those regulatory agencies,” he says.
Simonson also gives a 40,000-foot view of the various construction sectors - residential, non-residential, office, warehouse, retail, data centers, manufacturing, infrastructure and renewable energy – and what regions may fare better during the next six months and beyond.
If you’re wondering what’s at stake for construction or have election jitters, you won’t want to miss this episode of The Dirt.
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In this episode:
00:00 – What’s Going on With the Construction Economy?
01:41- Residential Construction
02:44 – Non-Residential Construction
03:48 – Retail Construction
04:17 – Data Center Construction
05:29 – Manufacturing Construction
07:12 – Infrastructure Construction
07:34 – Renewable Energy Construction
08:09 – Current State of Construction Employment
11:17 – State by State Construction Economies
12:50 – Construction Economy Outlook for the Second Half of 2024
16:12 – How Will Recent Supreme Court Cases Impact Construction?
17:38 – Final Thoughts
00:00:00:10 - 00:00:19:05
Bryan Furnace
Heavy duty engine oils. Proven engine protection at prices you can rely on. Giving you even more reasons to choose Delo. Hi everybody. Welcome back to Equipment World. You're watching the dirt. I'm your host, Brian. And today, we're back for another economic update. As a lot of you are probably aware, it's been kind of a funky year out there.
00:00:19:07 - 00:00:38:23
Bryan Furnace
I don't know about you guys, but for us, it was a really slow start, and then we started to gain some traction. But a lot of trades are still kind of slow. And with the election year coming up, what's in store for us here to answer all those questions is my man, the economist Ken Simonton.
00:00:39:01 - 00:00:43:19
Bryan Furnace
Well, Ken, it's great to see you again. Thank you for coming back for yet another economic update for us.
00:00:43:21 - 00:01:04:05
Ken Simonson
Sure. Glad to be with you again, and particularly at a time when it looks like there's still quite a bit of good news to talk about. Let me get right into it, because I know there are some people who have their doubts about how construction is doing. And indeed, as as always, the data is somewhat mixed, but overall I think the picture is positive.
00:01:04:07 - 00:01:28:06
Ken Simonson
The U.S. Census Bureau reports on the first business day of each month on a series they call value put in place, which is a measure of spending on projects underway. And that figure has been a somewhat muted lately. specifically the last couple of months. And the latest data is as of May. Total construction spending slipped by a tenths of a percent.
00:01:28:09 - 00:01:55:02
Ken Simonson
Certainly a minor downturn, but it was a repeat negative reading. When you dig into the numbers, though, there's a whole lot of variation going on and quite a bit of churning. For instance, the private residential spending, which includes new single family, new multi-family and also spending by owners on, updating or adding to their homes that, declined by a couple of tenths of a percent.
00:01:55:04 - 00:02:32:18
Ken Simonson
And we've been seeing a steady diminution of multi-family construction, single family has been more mixed, as you would expect, with mortgage rates staying in the range of 7% for that 30 year fixed rate. that's really caused a lot of people who wanted to buy a first home to say, we just can't afford the monthly payments and people who have paid off their mortgage or who have, one of those sweet 3% mortgages that were available two and three years ago, you're saying, wow, I think I'll stay put instead of moving to that new location or, new type of housing that I would have preferred.
00:02:32:22 - 00:03:03:05
Ken Simonson
So that certainly has held down single family construction. Nevertheless, I think the trend is going to be gradual growth in single family, even as multi-family declines on the nonresidential side. It's also a mixed story, seeing a huge drop off in office construction. People just are not returning to offices, particularly downtown offices. And, the tenants are moving to smaller spaces or going entirely virtual in a few cases.
00:03:03:09 - 00:03:28:15
Ken Simonson
So demand for new office construction, and I think it's going to remain depressed for quite a while. The warehouse market also was extremely strong in the pandemic when it was so hard to get goods retailers and others were stockpiling as much as they could get their mitts on, and also as consumers were buying more durable goods. Well, you don't need to replace or refrigerate every year or every second year.
00:03:28:15 - 00:04:02:04
Ken Simonson
So there's been a shift away from buying goods, more being spent on services and so-called experiences, travel and whatnot. And as a result, and of course, the supply chain has improved a great deal. As a result, the demand for storage space and warehouses has really been dropping off. Third, retail is quite a mixed market where you had restaurants or consumer services located close to downtown offices as people have failed to return to the office, those businesses have shut their doors.
00:04:02:06 - 00:04:27:12
Ken Simonson
But to the extent that people are now working from home or in a remote location, maybe have an easier time getting out for an hour or two to do errands in the middle of the day. Demand for retail near those locations has been quite strong. Offsetting all of that, however, it's tremendous growth for data centers. Census Bureau on July 1st, for the first time, produced estimates on data centers.
00:04:27:12 - 00:04:49:17
Ken Simonson
They were already collecting them as part of their estimate for office. But to my eternal frustration, they weren't showing the data center piece. And so office looked like a much stronger market than it really was. Now we know the truth. In the last 12 months, up through May of this year, construction spending on offices, private offices declined 18%.
00:04:49:19 - 00:05:24:14
Ken Simonson
And that even includes a fair amount of remodeling that was going on. Meanwhile, data centers were growing at a 69% rate. Spending on data centers increased for 12 straight months, and this was the strongest year over year increase yet. But that's not the end of the story. I think they're growing and just going to keep growing. At just in the last couple of months, both Amazon and Amazon World Services and and meta, the parent of Facebook and Instagram, so forth, they've been announcing multiple projects of 800 million or $1 billion in multiple states.
00:05:24:14 - 00:05:51:21
Ken Simonson
So I think the data center market is going to continue to be really hot manufacturing, construction that's also hit a few bumps. Certainly, the demand for electric vehicles isn't what the manufacturers expected. In June, a Fisker Automotive, a startup, declared bankruptcy and shut down. VinFast, a Vietnamese manufacturer that was hoping to produce EVs in North Carolina. they have yet to go ahead with their plan.
00:05:51:23 - 00:06:13:04
Ken Simonson
And some of the legacy manufacturers, notably GM and Ford, have, slowed down the amount of construction they're going to do for EVs and the battery plants that are needed for those. So that piece of construction, manufacturing, construction looks a little bit shaky, although it's still a growth segment compared to where it was a few years ago.
00:06:13:05 - 00:06:59:14
Ken Simonson
The biggest piece of manufacturing is these gigantic plants to produce semiconductor wafers, and those are sprouting in numerous parts of the country. Again, they've hit some constraints in terms of getting equipment, getting qualified labor. But, they are certainly pushing up construction of manufacturing plants as a category a great deal. And we should be getting other types of manufacturing plants as more companies, want to bring production back to the US to get away from actual or potential conflict areas or avoid being subjected to tariffs, and also to qualify under the Build America Buy America Act, to say their products are made in the US and therefore eligible to be used in projects that get
00:06:59:14 - 00:07:30:05
Ken Simonson
federal funding or grants or loans. And so I think manufacturing construction will be right up there with data centers as a super growth market for the foreseeable future. And also we have great growth in infrastructure that's already been happening. but really, the money from the infrastructure Investment and Jobs Act passed over two and a half years ago, that still hasn't mostly not been committed in terms of actual contracts signed or projects underway.
00:07:30:10 - 00:08:00:01
Ken Simonson
And more and more of that is coming forth. And then finally, renewable energy, huge investment in solar in, transmission lines and utility scale battery storage, not so much in wind. That had been a growth market earlier, but it dropped off, in 2023 according to the latest census numbers. And projections by the Energy Information Administration. But nevertheless, that the broad category of renewable energy still looks like a big growth area.
00:08:00:03 - 00:08:07:16
Ken Simonson
So put it all together. And I do see construction spending rising in the rest of 2024 and beyond.
00:08:07:18 - 00:08:27:00
Bryan Furnace
Interesting. Do you have any feel for kind of the geographic aspects? Are there certain areas of the country that are going to see stronger growth and others? Are there certain areas of the country that might be experiencing a little shrinkage? But before we get into that, I want to take a second to tell you about the sponsor of this video, Chevron Lubricants.
00:08:27:02 - 00:08:51:21
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00:08:51:23 - 00:08:56:06
Shawn Frasier
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00:08:56:08 - 00:09:04:04
Bryan Furnace
Are there certain areas of the country that are going to see stronger growth in others? Are there certain areas of the country that might be experiencing a little shrinkage?
00:09:04:06 - 00:09:26:17
Ken Simonson
You get some insight on that from the Bureau of Labor Statistics. They, of course, put out the National Employment Report generally on the first Friday of each month, and they follow that up about two weeks later with a report on employment by state, and then another week or ten days later, employment by metro area. So AGC looks at all three of those series.
00:09:26:17 - 00:10:07:12
Ken Simonson
The latest employment report nationally that came out on July 5th showed that construction employment increased by 27,000 from May to June at what's called a seasonally adjusted rate. And that was more than the average over the previous 12 months. So no immediate sign of slowdown in construction. In fact, when you break it apart and BLS provides information on five types of construction companies, we looked at residential building firms that would be home builders and multifamily general contractors, plus residential specialty trade firms, whether they're working on new homes or additions and renovations to existing homes.
00:10:07:14 - 00:10:40:17
Ken Simonson
Add those two together. Growth has continued, even though, as I said, there has been some slowdown in the amount of construction happening on the residential side. The growth over the last 12 months was 1.7% that matched the overall economy. So still doing pretty well. That's a real growth story. Nonresidential construction, employment that's building, nonresidential building and specialty trade contractors, plus heavy in civil engineering firms, construction firms that are doing things like highway and water and sewer projects.
00:10:40:19 - 00:11:08:12
Ken Simonson
Their growth rate was 3.8% in employment. So clearly still growing very fast. And yet there are many states where we think growth would have occurred at a greater rate of. Contractors have been able to get the workers they need. The unemployment rate among people with construction experience was at an all time low for June. Series goes back 25 years now, and the rate was just 3.3%.
00:11:08:14 - 00:11:39:01
Ken Simonson
That was lower than for the overall economy. So, construction firms really are having trouble filling all the positions they want. Now, you asked about state by state in the latest figures at the state level, which shows, covering May 39th states did add construction workers, ten lost workers. One North Dakota was unchanged in June. But, basically we are seeing construction growth happening in many parts of the country.
00:11:39:07 - 00:12:03:18
Ken Simonson
It happened in the year ending in May. The strongest growth was in Alaska. It was up 20%, and then in Hawaii up 10%. But in general, the strongest growth has been in some of the smaller Western and Great Plains states. South Dakota, Idaho and Nevada has consistently done well. Utah has done quite well. The laggards tend to move around.
00:12:04:00 - 00:12:31:20
Ken Simonson
Typically. We do see about 10 or 12 states declining on a year over year basis, but some of them come back after a while. I would say the slower growth has tended to be in New York and Pennsylvania, Illinois, but no clear cut pattern as to where growth has lagged. And even though states have certainly gotten some of these big advanced manufacturing plants for semiconductors or autos, Michigan, for instance, has done quite well.
00:12:31:22 - 00:12:50:02
Ken Simonson
and some of the other Midwestern states, Ohio has been doing extremely well in attracting, a variety of business, of course, one of the biggest semiconductor plants. It's also got some transportation equipment, and, more people moving to Ohio, particularly the Columbus and Central Ohio region.
00:12:50:04 - 00:13:10:18
Bryan Furnace
Well, this is the part of the show where I ask you to reach into your magic eight ball and predict the future for us. Do you have any feel for what the end of this year is going to look like, especially considering this is going to be quite a spicy election year? I believe any impacts that you can foresee coming to the construction industry.
00:13:10:19 - 00:13:48:12
Ken Simonson
As the lead times on construction are so long, even for private projects, but especially for public projects, as we've seen with the infrastructure money that has been so slow to come out. I don't think that the fact that we're into the second half of an election year is going to make much difference in the amount of construction that takes place, or the types or the location of construction that actually takes place in the rest of this year, I would expect this administration, as we've seen in past election years, to to make some big, splashy announcements about projects that they are awarding.
00:13:48:12 - 00:14:14:01
Ken Simonson
But it turns out that many of those announcements are really tentative. They require a lot of follow up in terms of signing agreements, getting environmental impact statements, getting financing, and so forth. That's why I say the actual construction isn't going to change much from what it would if this were not an election year. The election will make a big difference in the regulatory environment.
00:14:14:01 - 00:14:36:07
Ken Simonson
The construction works under Supreme Court has already overturned quite a few precedents or or given guidance that's different from what had been the case for as much as 40 years or so. That's already going to cause some turmoil in coming years as to what, regulatory agencies are allowed to do, what they've done in the past, whether that will be allowed to stand.
00:14:36:09 - 00:15:03:08
Ken Simonson
But in terms of new regulations, I think there would be a big difference, just as we've seen in past, swings between Democratic and Republican administrations, for instance, permitting under that so-called waters of the United States, how much does a intermittent flowing stream or a ditch or other areas where you see water part of the year? how much does that connect to actual interstate waters?
00:15:03:08 - 00:15:35:12
Ken Simonson
And therefore, does the federal government have jurisdiction? Certainly a difference in labor and wage regulations and in the requirements for apprenticeships or training, perhaps in the heat rules. So a lot of things do depend on who's in office, both in the white House, who they appoint to those regulatory agencies in terms of what Congress might do. While there may be some Republicans who would talk about cutting back spending on infrastructure, it's mighty popular.
00:15:35:13 - 00:16:12:05
Ken Simonson
And of course, when, Donald Trump was president, he kept talking about unprecedented amounts of infrastructure. Spending didn't happen. President Biden did get a huge infrastructure bill done in his first year in office. But I think the reality is that now that it's in place, most of that money will keep coming forward. But in terms of supporting additional construction and in particular renewable energy, or on the other side, oil and gas related construction, those things would also be up for grabs.
00:16:12:07 - 00:16:33:00
Bryan Furnace
I was going to say it does, with the recent Supreme Court rulings, seem like it would be a bit in the favor of the construction industry, just to have a loosening and a lax ness to a lot of the regulations that have traditionally held projects back. It seems like this is kind of a prime time for maybe some of these projects to pull the trigger to see if they can kind of get away with some stuff.
00:16:33:00 - 00:16:35:04
Bryan Furnace
Would you would you agree there?
00:16:35:06 - 00:17:06:14
Ken Simonson
Well, I wouldn't go with your characterization of getting away with stuff. I, I, I think we can agree that, the industry should have an easier time getting projects approved, but that won't come right away. Yes, the Supreme Court did rule in a very important case or a couple of them. but to actually go back and undo regulations is also a long process.
00:17:06:14 - 00:17:30:08
Ken Simonson
And there's still a lot of uncertainty about how much authority the agencies that have already put out these regulations had to do that. And so I think we're going to see a lot more litigation. It could go back to the Supreme Court on certain issues. So, while people can be hopeful, they shouldn't expect, immediate change in how quickly projects can get approved.
00:17:30:10 - 00:17:53:16
Bryan Furnace
that makes total sense now that you now that you put it that way, I agree, I think there will be a lot more litigation before things can actually move forward. Well, Ken, thank you so much for the update. This has been super helpful. And hopefully, we'll see you around next quarter. Well, thank you again for Ken coming back on the show to just give us some feelers as to what to expect this year and to kind of give us a quick synopsis of what's already happened and why.
00:17:53:18 - 00:17:58:00
Bryan Furnace
So, as always, I hope this helps you and your business. We'll catch you on the next episode of The Dirt.
