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Timothy Dunne |

Vice President

Timothy Dunne

Timothy Dunne is a former vice president and economist of the Federal Reserve Bank of Cleveland.

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Meet the Author

Brent Meyer |

Economist

Brent Meyer

Brent Meyer is a former economist of the Federal Reserve Bank of Cleveland.

03.21.07

Economic Trends

Construction Activity and Employment

Tim Dunne and Brent Meyer

The headline numbers for construction typically focus on residential construction activity. The recent news has not been very good. On a year-over-year basis, new housing starts fell 28.5 percent from February 2006; and although they rebounded in January by 9.0 percent, housing starts remain close to multi-year lows. Permits and completions have been similarly weak. A current Trends article provides a detailed analysis of recent housing market developments.

However, private residential construction makes up only about 48.8 percent of construction activity in the United States. The remainder of construction activity includes private nonresidential (27.0 percent), public nonresidential (23.4 percent), and public residential (0.8 percent) construction. About two-thirds of private nonresidential construction consists of commercial, office, health care, and manufacturing projects, whereas about one-half of public nonresidential construction consists of education and highway projects.

Following the 2001 recession, nonresidential construction spending grew much more slowly than residential spending but has accelerated more recently. In 2006, growth in residential spending turned negative but was partially offset by strong growth in both nonresidential public and private spending. As a result, nominal construction spending grew overall 4.9 percent in 2006, compared to 10.7 percent in 2005.

The slowdown in residential construction activity has had a muted impact on employment in the construction sector. Employment held steady in 2006, hovering around 7.7 million jobs, though employment in construction bears watching as there was a net decline of 62 thousand jobs last month. Still, on a year-over-year basis, construction employment is down only 0.2 percent from February 2006.

However, employment in the residential construction sector has not been immune to the weakness in housing statistics. Of all those employed in construction industries, only 43.2 percent work in residential construction, while 43.8 percent work in nonresidential building construction and 13.0 percent work in heavy and civil engineering construction. Of those employed in residential construction industries, about 30 percent work for general building contractors and the rest work in specialty trades (for example, roofing, plumbing, and concrete contractors).

The changes in recent employment look markedly different for nonresidential and residential building industries. On a year-over-year basis, employment in residential construction contracted by 133 thousand jobs, or -3.9 percent of residential construction jobs. Outside of residential construction, employment grew by 116 thousand jobs, or 2.7 percent of nonresidential construction employment.

On a cautionary note, the MIT Center for Real Estate reported that the demand for office properties remained strong at the end of 2006, but there was some weakening demand in the apartment, retail, and industrial property sectors based on their models. This weakening demand could affect workers employed by companies that do multifamily housing and private nonresidential construction going forward.