Three Factors Holding Back U.S. Construction Labor and Material Costs

For an owner contemplating a construction project, there are always worries about labor and material costs. This Economy at a Glance provides guidance in those areas through two tables. 

The first shows average hourly and average weekly earnings in all the major industry sub-sectors, including construction, of the U.S. economy. These statistics are published each month by the Bureau of Labor Statistics in the Employment Situation Report.

Average hourly earnings year over year (y/y) in construction are still restrained, at +0.9% versus an all-sector +1.6% rate of increase.

Average weekly earnings in construction, however, at +4.5% y/y are tied with ‘retail’ for fastest among all type-of-job categories and well ahead of the +2.5% increase for ‘total’.

The speedier gain for weekly earnings compared with hourly is due to workers being on job sites longer – which is quite alright, since it’s an indicator of healthier activity levels.

Also worth noting from Table 1 is the low level of pay in ‘leisure and hospitality’ work. That’s why when analysts say there’s been a big jump in the number of jobs in that sector, they almost always add the qualifier, ‘but they’re low paying’. 

Nor do workers in retail trade fare particularly well, at only $14.65 per hour in the latest month.

At the high end of the earnings spectrum are workers employed by utilities ($33.45 hourly).

Construction workers ($24.76 per hour), while not quite on the top rung of the ladder, can be pleased that they’re earning $5.00 per hour more than employees in manufacturing.

With respect to construction materials, Table 2 shows year-over-year (y/y) and month-to-month (m/m) Producer Price Index results for February 2015. The broadest measure for construction material costs rose 2.0% y/y. For five categories of non-residential building construction, the increases ranged from +1.0% y/y for health care facilities to +2.5% y/y for office buildings.

But that’s just the top-level story. Among individual building products, there were some monumental fluctuations, brought on by the greater-than-50% plunge in the world price of oil.

In February, asphalt was -24.6% y/y and -12.4% m/m.

Iron and steel scrap was -33.8% y/y and -19.3% m/m. Oil exploration and drilling is being radically scaled back, reducing the need for steel piping.

On the flip side, though, cement producers recently received good news. Federal regulations governing hydraulic fracturing now require that wells be lined with concrete to limit seepage. 

All of the categories in Table 2 featuring natural gas are feeling the negative effects of the precipitous slide in fossil fuel prices.

Bottom line? Even as construction overall is experiencing cyclical improvement, there are three factors holding back more severe cost upticks at this time.

1) Based on a labor force participation rate that is lagging and a too-high part-time versus full-time employment ratio, there continues to be a surfeit of workers to draw on, although this availability is quickly diminishing. The nation’s official unemployment rate is now only 5.5%.

2) Single-family residential housing starts − which especially impact lumber prices − are still nowhere near ‘normal’ (i.e., about 600,000 units seasonally adjusted and annualized in recent months compared with 1.2 million units historically).

3) Low cost energy is having wide-ranging effects that serve to dampen transportation and heating/cooling charges. There’s an additional bonus for producers when oil and gas is used in making vinyl siding, plastic pipes, etc.

A stronger surge in construction costs is probably still six months to a year away.

Table 1: Earnings of Production and Non-supervisory Employees on

U.S. Private Non-farm Payrolls

	Average Hourly					Average Weekly
	Feb 2014	Feb 2015	% Change			Feb 2014	Feb 2015	% Change
Total	$20.48	$20.80	1.6%			$686.08	$703.04	2.5%
Goods producing	$21.46	$21.70	1.1%			$877.71	$900.55	2.6%
Mining & logging	$26.71	$26.33	-1.4%			$1,268.73	$1,229.61	-3.1%
Construction	$24.55	$24.76	0.9%			$947.63	$990.40	4.5%
Manufacturing	$19.48	$19.69	1.1%			$810.37	$826.98	2.0%
Durables	$20.56	$20.78	1.1%			$865.58	$878.99	1.5%
Non-durables	$17.68	$17.90	1.2%			$723.11	$742.85	2.7%
Services providing	$20.27	$20.61	1.7%			$654.72	$669.83	2.3%
Wholesale trade	$23.09	$23.31	1.0%			$888.97	$902.10	1.5%
Retail trade	$14.25	$14.65	2.8%			$423.23	$442.43	4.5%
Transportation & warehousing	$20.30	$20.68	1.9%			$775.46	$800.32	3.2%
Utilities	$32.95	$33.45	1.5%			$1,390.49	$1,404.90	1.0%
Information services	$28.66	$28.45	-0.7%			$1,031.76	$1,024.20	-0.7%
Financial activities	$24.42	$25.15	3.0%			$893.77	$928.04	3.8%
Professional & business services	$24.19	$24.43	1.0%			$856.33	$869.71	1.6%
Education & health	$21.54	$21.93	1.8%			$687.13	$701.76	2.1%
Leisure & hospitality	$11.95	$12.32	3.1%			$299.95	$311.70	3.9%

Data source: Table B-8, Employment Situation Report, Bureau of Labor Statistics.
Charts: CanaData - CMD.

Table 2: U.S. Producer Price Index Results February 2015

	Feb 15 vs		Feb 15 vs
	Feb 14		Jan 15
Product/Good/Service/Commodity	(y/y)		(m/m)*
Final Demand Construction	2.0%		0.1%
Construction for private capital investment	2.0%		0.1%
Construction for Government	1.8%		0.1%
New warehouse building construction	2.2%		-0.1%
New school building construction	1.7%		0.1%
New office building construction	2.5%		0.2%
New industrial building construction	2.1%		0.2%
New health care building construction	1.0%		0.1%
Architectural & engineering services	2.3%		0.4%
Construction machinery & equipment	1.4%		-0.2%
Asphalt	-24.6%		-12.4%
Plastic construction products	1.1%		1.0%
Softwood lumber	-4.5%		-3.7%
Hardwood lumber	-2.1%		-0.3%
Millwork	2.4%		0.3%
Plywood	4.9%		-2.5%
Gypsum	1.6%		3.9%
Construction sand, gravel & crushed stone	2.6%		0.0%
Cement	9.4%		0.0%
Concrete products	4.4%		0.2%
Coal	-1.1%		-0.2%
Iron ore	-0.1%		0.0%
Iron and steel scrap	-33.8%		-19.3%
Steel mill products	-3.6%		-1.8%
Fabricated structural metal products	1.0%		0.0%
Flat glass	1.9%		-0.6%
Lighting fixtures	1.8%		0.1%
Plumbing fixtures & brass fittings	3.1%		-0.1%
Heating equipment	1.8%		0.5%
Natural gas to electric utilities	-9.4%		-0.2%
Commercial electric power	2.9%		0.2%
Industrial electric power	3.1%		-0.3%
Residential electric power	4.6%		-0.1%
Commercial natural gas	-6.2%		-1.4%
Industrial natural gas	-11.0%		-4.0%
Residential natural gas	-9.2%		-2.1%

* m/m is based on seasonally adjusted data.

Data source: Bureau of Labor Statistics.

Chart: CMD.

Source: CMDGroup