The Economy: Steady as She Goes?

Ulf Wolf / February 2019

Both Dodge Data and Analytics and Associated Builders and Contractors report great October 2018 figures for construction starts and unemployment, although ABC does point out that material prices continue to rise—now almost 8 percent above last year’s October numbers.

The National Picture
According to Dodge Data and Analytics, new construction starts in October climbed 21 percent to a seasonally adjusted annual rate of $864.0 billion.
    
Said Robert A. Murray, Dodge Data & Analytics’ chief economist, “During 2018, the presence of very large projects in a given month has played a considerable role in shaping the monthly pattern of activity: In October, it was nonresidential building that especially benefitted from the start of very large projects.
    
“These included a $2.4 billion petrochemical plant in Texas, the $1.4 billion Terminal One building at Newark Liberty International Airport, the $860 million expansion to the Las Vegas Convention Center, a $750 million Facebook data center in Utah, and a $655 million concourse expansion at Denver International Airport that’s part of that facility’s extensive upgrade.”
    
As for 2019, ABC Chief Economist Anirban Basu forecasts another strong year for our sector, although according to a recent 2019 economic outlook published in “Construction Executive” magazine, he does warn about inflationary pressures.
    
His forecast goes on to state that job growth, high backlog and healthy infrastructure investment all spell good news for the construction industry. However, historically low unemployment has created a construction workforce shortage of an estimated 500,000 positions, which is leading to increased compensation costs.
    
Says Basu, “U.S. economic performance has been brilliant of late. Sure, there has been a considerable volume of negativity regarding the propriety of tariffs, shifting immigration policy, etc., but the headline statistics make it clear that domestic economic performance is solid.
    
“Nowhere is this more evident than in the U.S. labor market. As of July, there were a record-setting 6.94 million job openings in the United States, and construction unemployment reached a low of 3.6 percent in October.”
    
However, while the U.S. economy is thriving, Basu cited the potential long-term impact of rising interest rates and materials prices—up 7.9 percent on a year-over-year basis in October—in the U.S. construction market. In addition, the workforce shortage will continue to impact the market in 2019.
    
That said, Basu stressed that a recession is unlikely in 2019, even with recent financial market volatility. Indicators such as the Conference Board’s Leading Economic Index, which often signals an economic downturn, have continued to tick higher, implying current momentum will continue for at least two to three more quarters.
    
In addition, ABC’s Construction Backlog Indicator, which reflects the amount of work that will be performed by commercial and industrial contractors in the months ahead, reported a record backlog of 9.9 months in the second quarter of 2018.
    
While optimistic for next year, Basu did warn that “contractors should be aware that recessions often follow within two years of peak confidence. The average contractor is likely to be quite busy in 2019, but beyond that, the outlook is quite murky.”
    
Needless to say, national conditions and trends do not always translate to local levels. For that we talked with contactor members of the Association of the Wall and Ceiling Industry.

Local Economies
How do you characterize your local construction economy?
    
Jerry Smith, AWCI’s president as well as president of Baker Drywall Austin, Ltd. in Texas, says, “Overall, our economy remains very strong. We’ve experienced good growth in all of our Texas markets—lots of work, although with low margins.”
    
Todd Lawrie, president of Delta Contracting Service, Inc. in Michigan, puts it succinctly in one word: “Robust.”
    
Richard Wagner, owner of RWE – Richard Wagner Enterprises, LLC in North Carolina, was just as brief: “Great!”
    
In the San Francisco Bay area, Craig Daley, president of Daley’s Drywall & Taping agrees: “We are thriving with high-tech and multifamily projects. Everyone is busy.”
    
Adam Barbee, Craig Daley’s general superintendent concurs: “As of now, it’s stable and on cruise control, but it will eventually lose momentum—until the next upswing.”
    
Moving down the California coast to Los Angeles, Greg Smith, executive vice president at Superior Wall Systems reports, “We are experiencing an unprecedented building boom here in Los Angeles. We have never seen a volume of new job starts like this, and it appears to be continuing for the next few quarters at least.
    
“We have a few very large, high-profile projects that are carrying a portion of this economy. Once these wrap up, there will be a natural recession of work here, but it will remain pretty brisk.”
    
On the other side of the country in New York City, Lee Zaretzky, president of Ronsco, Inc., weighs in with another one-word piece of good news, “Vibrant.”
    
Reporting from Dallas, John Hinson, division president at Marek concurs: “These days, there are many cranes in the sky around Dallas–Fort Worth and the amount of work continues at a steady pace.”
    
Says John Kirk, owner of Kirk Builders in the California, another view of the San Francisco Bay Area: “Over the last two years, the economy has been the most robust I've ever seen it, by far.”
    
Weighing in from Maryland, Robert Aird, president of Robert A. Aird, Inc. reports, “By all accounts, construction—both new and restoration—remains very busy.”

2019 Outlook
From your vantage point, how does 2019 look?
    
Reports Jerry Reicks Jr., president and CEO of JARCO Builders, Ltd. in Iowa, “Here in Sioux City, the commercial side will remain very strong in 2019; and we have a record backlog for the rest of the year. We see our housing market slow a bit, but I think that will only be temporary.”
    
Jerry Smith says the Baker companies “are maintaining strong backlogs for 2019 at all of our Texas locations; however, we do not expect margins to improve.”
    
Lawrie says the year “will start off relatively slowly as usual, then pick up a couple months in.”
    
“Pending any world disasters,” says Wagner, “Great!”
    
Daley’s view is that “our GCs are saying their backlog looks good for 2019. 2020 and beyond is another story—everyone knows this boom has to come to an end someday.”
    
Barbee corroborates, “2019 will maintain a solid run, though as we get closer to 2020, it may lose a little momentum.”
    
Greg Smith is still seeing many bids for 2019 starts and says, “The upcoming year looks very bright.”
    
Zaretzky’s view is equally bright, “We’re booked solid through the end of 2019, and the sentiment is that things will continue this way into 2020 and beyond.”
    
Hinson expects to see “the number of cranes to remain steady, just moving to new job sites.”
    
Kirk thinks the first half will continue strong “because you can only stop a steam roller gradually. After that, I’m not so confident,” he says. “The stock market has been hammered with no gains showing for 2018. And the volume of broadcast bids is down quite a bit—by broadcast bids, I mean invitations to bid on jobs that are sent to a majority of U.S. contractors.”
    
Says Aird, “We are pretty much booked for all of 2019 and only bid maybe one of every 15 requests that we receive. And even then, we have to pick and choose the jobs we want to undertake. What that says is that there is plenty of work; the problem is a shortage of qualified workers in just about every trade.”

Rank and File
Do our member contractors’ employees appreciate this stronger construction economy?
    
Reicks reports that his employees “all have seen significant pay increases to keep up with other industries, and saw an additional [raise] across the board Jan. 1.”

Says Lawrie, “Our guys take it in stride. Most know from experience that construction goes in cycles.”
    
Wagner relates: “We are all very thankful for the increased investor confidence that is driving the North Carolina economy.”
    
Daley says, “Everyone is working. We let our crews know we have a good backlog and we need them to hurry onto the next job. Having work ahead is a comforting feeling for all of us.”
    
“While the economy remains strong,” says Barbee, “it is much appreciated and provides well-deserved fruits.”
    
Says Zaretzky, “My company guys appreciate it—especially around the holidays when there’s a push to complete things sooner, which means overtime; that and the confidence of continued employment makes for a good feeling.”
    
“The guys appear to be motivated by our consistent workload and the one ahead of us,” says Hinson, “as well as by higher wage-expectations.”
    
Adds Aird, “Knowing that they have work well ahead, they have stability in their lives and can focus on things other than just getting by.”

Low Unemployment
According to the Bureau of Labor Statistics, the October 2018 construction unemployment rates fell nationally (and in 45 states) on a year-over-year basis. The October 2018 (not seasonally adjusted) national construction unemployment rate fell 0.9 percent from the year before to 3.6 percent.
    
Overall, the construction industry employed 318,000 more workers nationally compared to October 2017.
    
Begging the question: How are the low unemployment rates affecting wall and ceiling contractors?
    
Says Reicks, “We have been looking for an estimator and a project manager for several months now, and of course, field employees continue to be an ongoing search.”
    
Observes Jerry Smith, “Manpower (or lack of it) is extremely critical to how much volume we choose to take on.”
    
Shares Wagner, “To grow our crew, we have begun running ads to appeal to the not-so-happy-where-he-is worker, and to those looking to work for a family operation rather than a large corporation. As a rule, we can offer them better pay, more hours, a better work environment, PTO (paid time off), insurance choices, etc., and a great opportunity for growth. What I have found is that the average line-worker wants to feel appreciated—we truly do appreciate everyone, and we let them know it.”
    
Observes Daley, “With everyone working full-time there is no one to hire; everyone who knows what they’re doing is already working. Therefore, we have to be very careful not to take on work that would require more labor than our core crews.”
    
“The shortage of qualified tradesmen really affects the bottom line,” says Greg Smith, “as well as how we look at obtaining new work and what kind of work we are considering. Securing too much work at a time like this can be very dangerous to an organization. After the recent recession, it’s odd to think we are making sure we don’t take on too much work!”

Labor Shortage Solutions
In a tight manpower market, what are the keys to solving a shortage?
    
“To attract potential employees,” shares Reicks, “we have implemented innovative rewards and recognitions to boost both production and morale, and we continue to be open to other ideas.”
    
“We are trying several avenues,” says Jerry Smith, “one being going to our rural-area high schools and talking to the students about a future in construction.”
    
Agrees and adds Lawrie, “Stop stigmatizing the construction industry. Younger people today seem to feel that construction is a last stop for those who can’t afford college or who cannot find a good job without a college education. As for me, sixth grade was the best four years of my life, and I’ve done just fine, thank you.
    
“Skilled trades can be a rewarding career as well as a good source of income. Kids in high school are being force-fed the idea that college is the only road to a secure future. The only thing college will guarantee you is an outstanding debt that may follow you for many years to come with no guarantee of a high paying job.”
    
Wagner’s view is that retention and training will help end the shortage. “And don’t take on more work than you have manpower to complete,” he adds
    
“Immigration reform is the key to our labor shortage,” says Daley. “We simply need a way for workers to be able to cross the border, apply, and be granted a work visa that lasts forever (unless they mess up).”
    
Greg Smith says, “Budget cutbacks in high school education have shut down the shop classes in many school districts. As a result, it seems that many young people aren’t as interested in becoming a tradesman as in years past. This may well be because they are no longer exposed to natural aptitudes they may have and so never discover them. We really need to figure out a way to reinvigorate the youth to explore positions in the trades.”
    
Adds Hinson, “We do not have a labor shortage at this time in our market. And the ultimate answer to this question, no matter what the market, is to pass comprehensive immigration guest worker legislation that keeps the American citizen worker front and center of the process.”
    
“Since there is this dearth of workers,” says Aird, “we look for ways to offset that shortage with systems that produce more work with fewer men. For example, we spray stucco and coatings when possible, rather than troweling, rolling or brushing.”
    
Aird also shares some very pertinent key points from a recent Wall Street Journal article: “The modern-day perks that once dazzled new employees and helped companies motivate their own workforce are not as effective in today’s seriously tight labor market. With unemployment sitting at 3.7 percent and more than 7 million jobs in the American economy unfilled, workers are not valuing the comfy couches, free food and single-origin espresso as much. Instead, they are assessing workplace culture, the value of their own role and whether they believe in management or not.”
    
Food for thought.

Material Costs
Construction prices for commercial construction rose 0.5 percent in October 2018 and were 7.9 percent higher than at the same time a year prior, according to an analysis of Bureau of Labor Statistics Producer Price Index. Prices for nonresidential construction material also increased 0.5 percent on a month-over-month basis and were up by more than 8 percent on a year-over-year basis.
    
This begs another question: How are rising material costs affecting your bids and your bottom line?
    
“So far,” reports Jerry Smith, “we are not seeing projects canceled due to the increase in material; however, it could start happening, especially if high tariffs are implemented.”
    
Says Daley, “Staying on top of material pricing is a daily struggle. Getting firm written quotes from our vendors is the best way to protect us from cost overruns. Once we know what we are paying, we just have to be smart enough to include it in our bid.”
    
Adds Barbee, “We make sure we place pricing front and center with all our fellow partners/GCs across the board. It lets them forecast as well as we do.”
    
Observes Greg Smith, “I don’t think the rising cost of materials is having a negative impact on our bids and bottom line. It is almost a fixed cost in terms of competition. We are all receiving the same materials costs on bid day. The downside will be the impact this has on inflation—with that comes rising interest rates and a resulting slowdown in economic growth.”
    
Zaretzky concurs: “Of course, price is always an issue, but our competitors will have to pay the same prices as we do for materials, so it really is not an issue for us.”
    
Observes Hinson, “Bids are higher and owners may not be able to absorb the extra costs. This is a concern, as building owners and developers pursue financing with historical data, and future forecasts will require more out-of-pocket cash. This will impact upcoming starts.”
    
Reports Aird, “It is becoming more difficult to have distributors and manufacturers hold pricing more than for several months. Our proposals must say that we reserve the right to additional contract value for unforeseen materials price increases.”

Taking Advantage
While the good times last, as a company, how do you best take advantage of a good economy?
    
Suggests Daley, “Since manpower limits how fast we can grow, we have to limit the number of clients and jobs we take on. That said, with this economy, we can handpick our clients and jobs, and so build good relationships that we’ll mine when things slow down.”
    
Barbee elaborates: “This is the time when you are able to build the best client relations. You have a lot of opportunity to work with other companies and show them what you can do, and what you have as a company. If you perform and build those positive relationships, people will always want to work with you in any economy.”
    
As for Greg Smith, “What we are able to do is pick and choose a little more. This is also a great time to start bringing along the younger talent we do have and move them up in the ranks.”
    
Zaretzky says: “We can be more selective with the projects we choose. Of course, we hope to be able to set cash aside for a rainy day, but with the end of the year and taxes and so on, that rarely happens; however, in a flush economy, we do invest in equipment upgrades and new technology—great investments for the future, which also minimizes taxes, of course.”

Other Thoughts
We’ll end with additional pearls of economic wisdom from AWCI member contractors:
    
Muses Jerry Smith, “I truly believe we will see continued growth into 2020; however, I am sure we will see some downturn as the elections draw near.”
    
“Take advantage of the upturn,” says Lawrie. “Do not take the jobs you know will be difficult unless the money is right.”
    
Wagner’s advice is this: “Stockpile cash for the next crash. Make sure you are debt-free. And don’t forget that the current economy is driven by what we need today—the question is: Can we look ahead and prepare for what we need tomorrow?”
    
Observes Daley, “In 2006 the economy was booming and if you’d asked us then, we’d have said it had no end in sight. Two years later, a screeching halt. Is 2019 a 2006? We keep looking for signs.”
    
Warns Kirk, “Good economies never last forever. And construction, including drywall, always feels the changes first.”
    
It is quite clear, both nationally and in many places locally, that the economy is roaring along, but the wise contractor will cast more than just a fleeting glance up ahead to catch any signs of slowdown.
    
Meanwhile, while the going is good, build your financial reserves, build your relationships and prepare for the eventual slump that will, probably later rather than sooner, rear its ugly head.

California-based Ulf Wolf is the senior writer at Words & Images.