Brett Williams
President, Construction
Rate Cuts, Power Demand and the Road Ahead
For the first time since interest rates started going up more than two years ago, we’re seeing rate cuts from the Fed as we close out the year. While the reverberations from rate cuts will take months to filter through the broader economy, the prospect of reduced rates represents a glimmer of hope from our customers that the cost of capital will ease, and that many projects put on hold can resume.
Data center construction continues at a fast pace. And with data centers’ need for power, we are seeing growth in generation, especially renewables. On the labor front, we’ve seen fewer job openings in construction recently, but in some trades and geographic regions, there is a large gap between supply and demand. We will highlight some of these regions below.
Our interview this quarter touches on two issues near and dear to our customers: quality and the supply chain. What happens when that product arrives on-site, but it’s not up to quality standards? Chad Cotter’s article can help you navigate and perhaps mitigate potential equipment quality concerns.
Thanks for reading. And as always, stay safe out there.
Economic Outlook
Inflation has continued to trend downward, with year-over-year price increases in the 2.5%-3% range depending on the measure. As of August 2024, the consumer price index (CPI) was up just 2.6% over the past year.
Looking at details of the index, the energy component has fallen over the past four months as gasoline and natural gas prices dropped. Over the past year, new vehicle prices have declined 1.2% with used vehicles down 10.4%. The housing component continues to be the biggest driver of increases in the overall CPI.
With prices tempering and unemployment rising (up to 4.2% in August), the Federal Reserve has signaled that interest rate cuts are coming. Economists are currently expecting rates to be 0.75% lower by the end of 2024. While rate cuts would help housing and other industries sensitive to interest rates, the overall effects could be offset by less stimulus to the economy in the form of interest payments. With the run-up in interest rates, federal government interest payments have grown to over $1 trillion dollars a year, double their 2020 level.
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Construction Recap
Nonresidential construction spending has been flat this year — but as a percentage of GDP, it remains higher than any time since 2009.
Manufacturing spending continues its meteoric rise, driven by investments in semiconductors, batteries and solar panel manufacturing.
Power construction increased 10% in 2023 (nominal dollars), with growth in public power spending and surging solar installations.
- Solar spending has increased 403% since 2018. The cost of solar construction has gone down over that time, meaning the growth would be even bigger when adjusted for inflation.
- Private electric utility spending has climbed steadily, and gas utility spending has been stable. Adjusted for inflation, both are well below their 2019 levels.
- Wind spending has fallen 50% over the past three years, though 2024 may see this trend reverse.
- Oil construction has fallen 89% since 2019.
The Census Bureau recently started reporting data center construction independently of the overall office category, providing insight into both the rapid growth for data centers and the drop-off in the office market:
- Since January 2023, data center construction has increased from $15 billion to $28 billion annually (though our analysis of other data sources suggests these figures could be too low).
- Excluding data centers, the office market has fallen dramatically, from $98 billion in January 2020 to $53 billion in July 2024 (real annual rate).
- Spending in the commercial sector has fallen from $146 billion to a $125 billion annual rate over the last ten months, primarily due to less warehousing construction.
Industry Outlook
In 2024, FMI is predicting 6% growth in construction for nonresidential buildings and 8% for nonbuilding structures, with slower growth in 2025. Dodge is forecasting a 10% increase in nonresidential construction starts in 2024, while ConstructConnect forecasts just 1.4% growth. (Construction starts precede construction spending by about a year.)
Dodge has generally been more optimistic about the overall economy. ConstructConnect was still expecting a recession in its Q4 2023 report. FMI continues to assume a recession in the U.S. in 2024, though its forecasts no longer show a drop-off in construction activity.
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Construction Labor
Despite fewer job openings in construction over the last few months, the unemployment rate for construction fell to 3.2% in August. Employment in nonresidential construction has grown by 3.5% over the past year, with nonresidential building construction employment up 4.7%.
Over the past few years, construction wages have followed a different pattern than the rest of the labor market, which saw the largest wage increases in 2021, before more moderate increases in 2022 and 2023. Workers at construction companies saw average weekly wages increase 3.7% in 2021, and then 5.1% in both 2022 and 2023. In 2023, nonresidential contracting sectors with the largest wage gains were roofing (up 8.5%), oil and gas pipeline (6.6%), flooring (6.4%), water and sewer line (6.1%), and plumbing and HVAC (6%) (Bureau of Labor Statistics Quarterly Census of Employment and Wages, includes bonuses).
The wage differences among states have narrowed over the past two years. States with above-average wages in 2021 saw an average increase of 9.3% from 2021 through 2023, while states with below-average wages saw an increase of 13.9%. The states with the highest increases since 2021 (NM, TN, KY, ME, ID and NC) all had below-average wages in 2021.
Data is for companies within these sectors, not by occupation.
According to Industrial Info Resources, which forecasts labor demand and supply for the industrial sector, demand in the Gulf Region is forecasted to be far greater than supply over the next few years for a number of construction trades, including scaffold builders, ironworkers, plumbers/pipefitters and welders. In the Midwest, electricians are projected to have the greatest mismatch between demand and supply.
Data provided by Industrial Info Resources.
Supply number excludes travelers.
Data provided by Industrial Info Resources.
Supply number excludes travelers.
Chad Cotter
Vice President, Construction
From Factory to Site: Overcoming Equipment Demand and Quality Challenges in Construction
Supply chain issues have plagued the construction industry for years. Though we’ve found solutions to overcome many challenges, concerns with quality equipment and hot, emerging markets are further exacerbating project execution delays.
Traditionally, original equipment manufacturers (OEMs) were largely responsible for turbines, generators and other heavy industrial equipment necessary for producing electricity. Significant disruptions during COVID steered EPC firms toward alternative suppliers, but these new paths soon became clogged as well — and, even now, the hampered supply chains have yet to be restored. Equipment manufacturers, all of which have varying degrees of quality control, had to work harder to produce more product at a faster rate because of skyrocketing demand. There is now a noticeable increase in and growing concern around the timeliness and amount of substandard product — much of which is still requiring significant assembly time — making its way to job sites.
The struggle for transmission equipment, for example, has intensified in the power industry, with flourishing markets like electrification competing for the same parts. In an industry experiencing supply chain disruption in roughly 30% of projects, the sizable demand for high-voltage breakers, insulators and essentially all parts responsible for transferring electricity across the country is prompting more questions than answers. For all project stakeholders, waiting on a $70,000 breaker for a $500 million project is unsettling territory.
Early identification and prioritization of long-lead items, schedule float and revision control (changes made on good, old-fashioned drawings) are viable solutions for newfound (and ongoing) concerns. High-voltage breakers used to be purchased during the engineering process, but they’re now some of the first things purchased when a contract is signed. Owners are proactively planning, sometimes buying parts four to five years in advance — even before a contract is inked — in anticipation of an upcoming project. Conducting a quality control audit also provides confidence that equipment is being made both on time and in accordance with the specification. Owners and construction team members are visiting factories to witness the manufacturing processes for large and critical project equipment — like the items that go inside control buildings and contain plenty of wiring and terminations. OEMs are likely to step up factory acceptance testing of their own suppliers to improve quality control.
Quality equipment is vital for critical infrastructure projects. We can’t cut corners or settle for inferior alternatives. Until we can pay more for quality equipment and expedited shipping — as consumers can when shopping for retail items online — these procurement strategies can help maintain project expectations for seamless execution.
