Construction Economics

Q2 2022 Construction Update

Good to Great author Jim Collins recommends that companies must “face the brutal facts” that confront the realities of organizations. The last week of March has been filled with such facts. To wit, the yield curve inverted yesterday (03/31/22), the unemployment rate hit a near 50-year low today (3.6% on 04/01/22), and inflation recently hit a 40 year high (7.9% on 03/10/22)…

What does this all mean? We are squarely in a late expansion phase of the current economic cycle and the next economic recession is looming.

Prior to every recession since 1956, the yield curve has inverted, meaning 2-year treasury bonds trade for more than 10-year treasury bonds (a signal that investors are de-risking their portfolios). Also, prior to every recession in the past 70 years, the unemployment rate troughed out just prior to the recession. Moreover, inflation is soaring and is at a 40 year high. Recessions occur when inflation is trending upwards. Objectively speaking, recessions are necessary for easing pricing pressures and the shortage of labor resources, and recessions serve to reset the economy for its next expansion cycle.

When will this happen? If history repeats itself, the next recession will occur in late 2022 or 2023. Understanding this dynamic is important as it allows individuals and corporations to make sound economic decisions regarding investments and capital expenditures over the next 12 to 24 months.

As Sun Tzu said around 500 BC, “in the midst of chaos, there is also opportunity.”

Total Construction Spending

VERTEX monitors the total construction spending to spot any changes in trends. Since a majority of construction spending is on professional labor, this becomes a good indicator on the health and growth of the industry.

Construction Spending Percent Change (Year over Year)

VERTEX analyzes each sector of construction spending as well as their yearly changes. The following chart of percent change provides an easier view of which sectors are having the highest growth of contraction.

Construction Employment

VERTEX looks closely at the total employees employed at the construction industry as an indicator. Historically the construction industry experiences large fluctuations of employment during recessions and expansions.

Unemployment Rate

VERTEX looks closely at the Bureau of Labor’s Statistics’ Unemployment Rate (U-3) to analyze whether the United States is experiencing a recession and the severity of it.

Labor Force Participation

While unemployment rate (U-3) focuses on active seekers of jobs, the labor participation rate gives a broader view of how many people have joined or left the workforce during the expansions and recessions.

Consumer Price Index: All Items in US, Annual Percent Change

Personal Consumption Expenditures, Annual Percent Change

Producer Price Index, Construction Materials

Federal Funds Effective Rate

The interest rate is one of the primary tools the Federal Reserve uses to help steer the economy. It goes without saying that interest ultimately impacts the ability to finance both private and public construction projects.

The Yield Curve (10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity)

The US Treasury issues bonds at different maturities for both short-term and longer-term needs of investment institutions. The yield of a bond depends on the purchase price, face value, and the rate of return. When there is a “flight to safety” situation, institutional money typically goes to purchasing the 10-year treasury notes, increasing the price and lowering the yield.

When the Yield curve between 10-year and 2-year goes below zero it is significant indicator of a recession. VERTEX closely monitors the movement of this yield curve due to how much recessions impact the construction industry.

30-Year Fixed Mortgage Average in United States

Changes in the 30-year mortgage rate impacts the demand for residential housing, a major sector of construction.

Crude Oil Prices: West Texas Intermediate (WTI) – Annual Dollars per Barrel Change

The price of oil is a major indicator to measure the change of prices for transporting construction materials, as well as the cost of some construction materials.

Real GDP Quarterly Change

CBOE Volatility Index: VIX

Corporate Profits After Tax with Inventory Valuation Adjustment (IVA) and Capital Consumption Adjustment (CCAdj)

US Federal Debt as Percent of GDP

UoM: Consumer Sentiment Index

Value of Construction Put in Place in the US, seasonally adjusted annual rate