The Building Tradesman Newspaper

Friday, November 30, 2018

Michigan starts to lag a bit with autumnal drop in construction

By The Building Tradesman

So far, the fall season has not been kind to Michigan's construction industry.

Like the weather, construction employment has gone a bit cold in the state, losing 3,000 jobs through September and October. Michigan ranked in the bottom five in construction employment gains/losses among all the states in both months, and in October our state was one of only six to lose construction jobs.

Still, the long-term trend was warmer: the Associated General Contractors reported Nov. 2 that Michigan's construction industry was still employing 10,000 more workers in October 2018 than it was 12 months earlier, a 6.1 percent increase that ranked Nov 16 among the states.

"Construction activity continues to expand at a steady clip, with employment growing by more than ten percent during the past year in five states and by more than five percent in another 18 states," said AGC Chief Economist Ken Simonson.

The AGC said widespread construction employment gains are a sign of strong demand for construction services. "Firms in many parts of the country are hiring as fast as they can find qualified workers to bring onboard just to keep pace with demand," said Stephen E. Sandherr, the AGC's chief executive officer. "But at some point, the increasing costs of labor and construction materials are going to drive construction prices to the point where many customers reschedule or rethink their projects."

Indeed, the cost of U.S. construction materials are responding to the ancient law of supply and demand. Attempting to recoup the fast-rising costs of labor and materials, the AGC said Nov. 9 that contractors are boosting bids on the price of new, nonresidential construction. In turn, that's putting the pinch on public officials seeking to improve buildings and aging infrastructure.

"Contractors and subcontractors raised their bid prices in November to make up for past cost increases, but the cost of goods and services that they buy rose even faster," said the association's chief economist, Ken Simonson. "That makes further bid-price increases likely but also implies some contractors will just stop bidding on projects where costs are too unpredictable to ensure they can be built profitably."

Simonson said that the producer price index for inputs to construction industries—a weighted average of all goods and services used in construction—climbed 0.6 percent in October, following a 0.2 percent rise in September, bringing the 12-month increase to 6.6 percent. In contrast, an index that measures what contractors say they would charge to construct five types of nonresidential buildings had a smaller 12-month gain—5.0 percent—despite having jumped 2.0 percent in October. The larger increase in contractors' costs than in their bid prices implies a squeeze on profit margins and sets up the prospect of further bid-price increases, the economist said.

Metals and petroleum-based products registered the largest increases among construction inputs, Simonson noted, although gasoline prices have fallen in recent weeks.  He pointed out that from October 2017 to October 2018, there were producer price index increases of 27.0 percent for diesel fuel, 18.2 percent for steel mill products, 11.6 percent for asphalt paving mixtures and blocks and 8.2 percent for aluminum mill shapes.

"It appears the tariffs imposed on steel, aluminum and thousands of Chinese imports are starting to affect the cost of many items used in construction," Simonson said. "As inventories of goods purchased before the tariffs took effect are depleted, contractors are likely to face even higher costs, which they will need to put into their bid prices if they hope to make any profit on future projects. At the same time, labor costs are accelerating. 

The Labor Department reported last week that average hourly earnings for all employees in construction rose 3.9 percent in the 12 months through October—the fastest pace in nearly 10 years."