Current Construction Recovery

Top Line vs. Bottom Line


Since 2012 the construction industry has been enjoying a robust recovery. In this blog I have been alerting contractors to the business risks hidden in the euphoria of construction market upswings. Now that we are years into the recovery, it is time to take a closer look at how the current market cycle has unfolded and how each period has affected the commercial, infrastructure segments of the industry and home building.

The Beginning of the End

Almost 2.4 million construction jobs vanished from 2007-2012 — that’s 24% of what was the sixth-largest sector in the United States (and now is the eighth-largest). Those are humbling numbers, but consider this: From 2001-2006, construction was the fastest-growing sector in the U.S. with job growth of 15%. Not even health care, at 14% growth, was keeping pace.

By 2014…


In July 2014, the total monthly valuation for all construction put in place (both public and private) was $981 billion, down from the construction sector’s peak back in March 2006, when it reached $1.2 trillion. Total monthly valuation for private construction, largely driven by the housing sector (which accounted for as much as half of all private construction in 2006) took the biggest hit, falling over 50%: from $961 billion in March 2006 to $466 billion in January 2011.


Labor, Lots, and Lumber


Home construction in the U.S. has been recovering from the housing bust since the early 2010s, but the recovery has been sluggish, and there are still fewer homes being built each year than the historical norm. Homebuilders and economists explain the sluggish recovery in terms of “Labor, Lots and Lumber,” referring to the shortage of construction labor, the difficulty of obtaining land for development in sought-after areas, and the rising cost of building materials.

Other Leading Indicators – 2016 to 2018


  • The Architecture Billings Index, for example, began to paint an upbeat picture in 2016. Like many diffusion indicators, any reading above 50 indicates that architects are busier in a given month than they were during the prior month. The latest readings have been above 50 without exception. The index is thought to lead relevant construction activity by nine to 12 months, which implies that contractors will continue to encounter many bidding opportunities during the months ahead.
  • Similarly, Associated Builders and Contractors’ Construction Backlog Indicator suggested that the amount of work under contract, but yet to be completed, was on the rise. In many categories and geographies, this backlog established an all-time high by 2017/2018.
  • Here’s an indicator of the recovery I particularly cherish: Year-to-date sales of Ford’s F-series of trucks, commonly used in the construction industry, were higher in 2018 compared to the same time period in 2017. This likely is a result of the overall strength of the recovery.

Infrastructure Spending


With Washington D.C. in gridlock since 2010, the much needed and heralded infrastructure spending bill has gone nowhere. It used to be that the country’s infrastructure largely depended on what spending bills came out of Washington, DC, but that’s no longer the case. While a much-discussed federal infrastructure package has taken a legislative backseat, the recent economic expansion has helped pad state coffers. According to the Pew Research Center, 34 states are taking in more tax revenue than they were prior to the Great Recession, even after accounting for inflation. These surpluses have caused some states to reinvest in their own roads and highways.

But What About Costs?


As we have discussed in recent blogs, the competitive skilled labor market has put a dramatic upward pressure on all construction wages.

But wages are where cost pressures begin, not where they end. Other sources of inflation include fuel prices, borrowing costs, health care, tuition, apartment rents, home prices, food and, of course, construction materials. According to the most current data available, construction materials prices rose 7.4 percent on a year-ago basis in September.

Between September 2017 and September 2018, crude petroleum prices rose by more than 47%, steel mill products by 18%, and prepared asphalt, tar roofing, and siding products by more than 9%.

The combination of rising human capital and materials costs is rendering the delivery of construction services more expensive.

Risk in Reward


Looking forward to 2020 and beyond, leading indicators remain upbeat. Consumer and business confidence remain elevated, and the global economy continues to expand. State and local government finances are improved in much of the country, which should continue to fuel spending on school construction, roads, bridges and other elements of the built environment.


But herein lies the caution I have been expounding since the beginning of this current recovery. The euphoria of top-line growth can mask the concurrent inflation in costs and put the all-important bottom-line in serious peril. After participating in the past nine years of steady sales growth, it is time to engage in risk mitigation and adjust focus toward profitability and cash flow.

Read More about the 2019 Construction Economic Forecast  and The Yin & Yang of Construction (The data above was extracted from the 2019 Construction Economic Forecast published in Construction Executive, December 2018, Anirban Basu, Chief Economist of Associated Builders and Contractors.)

Read More: Simplar