Growth rates in construction employment strongly support the emerging consensus around an economic soft landing.
Public policy put in place points toward a tailwind for construction employment and manufacturing.
Public policy put in place in recent years—with $300 billion going to public infrastructure and clean energy in addition to $53 billion allocated to jumpstart a semiconductor supply chain—points toward a tailwind for both construction employment and the manufacturing sector.
Despite a slowing of residential construction and commercial real estate development, we are optimistic about the demand for housing in addition to the development of the semiconductor supply chain, the rebuilding of domestic infrastructure and the creation of an advanced manufacturing complex.
All of these factors support robust employment for construction and reduce, though not eliminate, the odds that the economy will enter a recession next year.
Aggregate hours worked
For evidence of this growth, we can look to aggregate hours worked, which is the number of employees times the number of hours worked. This proxy measure of economic activity and labor market growth allows us to compare activity in the major sectors of the economy and to compare growth rates of employment and production over time.
- Service sector: As of September, activity in the service sector, which makes up 81% of aggregate hours worked in the U.S. economy, is growing at 1.4% per year. This is compared to 1.2% at the end of 2019.
- Goods-producing sector: The goods-producing sector accounts for less than 19% of total hours worked and is comprised of the manufacturing sector (11% of aggregate hours), the construction sector (nearly 7%) and the resource extraction sector (0.6%).
- Manufacturing: The manufacturing sector’s post-pandemic growth beginning in 2021 was remarkable, with firms hiring at prolific pace while investing in productivity. This comeback included a period of 4% or more in aggregate growth last year compared with the 0.9% decrease at the end of 2019. But hiring tailed off this year as new orders drifted lower and as firms girded for a recession. Manufacturing aggregate hours are now growing at a rate of only 0.2% per year.
- Construction: In the construction sector, aggregate hours are growing at 3.5% per year compared with 2.2% at the end of 2019. From 2021 through June, construction spending accounted for the greatest share of gross domestic product growth of any two-quarter period on record. According to the White House Council of Economic Advisors, GDP expanded at an annualized pace of 2.15% over that period, with .53 percentage points coming from manufacturing construction. To put this in perspective, through August manufacturing construction alone resulted in a 90% increase, or $184 billion, over year-ago levels.
Construction employment
The construction industry deserves a closer look, both as the predicate for resolving the housing shortage and for laying the groundwork for manufacturing growth.
In terms of workers employed in construction, the industry has yet to recover from the dual shocks of the manufacturing recession and the pandemic shutdown.
While the pre- and post-shock rates of growth appear to be close, a simple analysis suggests room to grow and little sign of that private investment is being crowded out by the government infrastructure and industrial policy programs.
We are optimistic that the crowding in of public investment will serve as an incentive for risk taking around construction and serve as a magnet for prime-aged workers 25 to 54 looking for higher wages in construction and goods production.
In fact, a report from the Treasury Department in June found the computers and electronics segment to be the dominant component of U.S. manufacturing construction. Still, construction for chemical, transportation, and food and beverage manufacturing is also up from last year. The report added that overall real nonresidential construction spending has increased by about 15% from November 2021, when the Infrastructure Investment and Jobs Act was signed, to April.
We can see the impact of the legislation in the employment data through September, breaking down construction employment into its four segments.
- Residential buildings: 11.6%
- Nonresidential buildings: 11%
- Civil engineering: 14%
- Specialty trades: 63%
In terms of growth, and confirming the Treasury Department’s analysis on construction spending, nonresidential construction employment is increasing by an average rate of 5.7% per year. Civil engineering employment is increasing by 4.5% per year. Specialty trade employment is increasing at 2.3%. Residential building in barely increasing, at 0.3%.
The reindustrialization of the U.S. economy
A paper by the Organisation for Economic Co-operation and Development in 2006 ironically found that at the time, the positive productivity effects from foreign materials sourcing were most pronounced among firms had that were already globally engaged in outsourcing. In addition, such engagements could be close to their optimum level in developed economies.
The 2006 paper could not have guessed that in just a few months, the floodgates of U.S. offshoring would open wide.
Read more of RSM’s insights on manufacturing and the middle market.
From 2006 and through 2009, after 30 postwar years of the United States being the industrial engine of the world, the manufacturing sector would enter the final chapter of its de-industrialization.
Producers would use the cover of the financial crisis and the economic downturn to take full advantage of tax avoidance strategies and the availability of cheap labor in offshore locations.
It took the 37 years, between 1943 and 1980, for service-sector jobs to become twice as prevalent as goods-producing jobs. But that shift accelerated dramatically, and by 2009, service-sector jobs were five times as great as goods-producing jobs.
While the Bush and Obama administrations did all they could to hold onto the automobile industry, there was little they could do for most every other manufacturing industry that left the U.S. for cheaper. and, as it turned out, more productive, labor in offshore locations.
That five-to-one ratio lasted throughout the recovery from the financial crisis and continues to drift along at 5.2 in the post-pandemic era. From the peak of manufacturing employment in July 1979 until September, the number of service-sector jobs has grown at an average rate of 1.9% per year while goods-producing employment has fallen at 0.3% per year.
The takeaway
Do the recent employment trends in nonresidential construction herald the rebirth of mass manufacturing? Probably not, but realism calls for public financing and promotion of goods like semiconductors that are in the national interest.
Inside the policy community, there is now a consensus that certain supply chains need to be in the United States and North America or in friendly economies at the very least. In particular, with the deterioration of diplomatic and trade relations with China and Russia, the U.S. needs secure supply chains for semiconductors, health products and energy to name just a few.
