Tuesday, October 23, 2007

Still At Work, But Not For Long

One puzzle that even Fed presidents find difficult to solve has to do with construction jobs. Though new housing starts have plunged, so far there have been no massive layoffs in the sector - at least not as measured by the BLS (see chart below).

Employment in residential building construction (seasonally adjusted) Chart: BLS

The two explanations that I hear most often have to do with (a) illegal, undocumented aliens not being counted and (b) switching work to commercial construction. Both are correct to a certain extent, but: (a) I find it hard to imagine that the proportion of jobs held by aliens was very much higher in 2006 than, say, 1988-90 and (b) the BLS does not show a commensurate increase in the number of jobs for the non-residential construction sector - employment there is flat. Plus, the number of jobs in the housing construction sector doubled since the last major housing recession in 1992, in line with housing construction activity (see chart below). So, the puzzle remains...

The answer to the puzzle is much simpler, I believe. Unlike other housing recessions, this time housing starts fell off a cliff from a record high level - everything happened very, very fast. This means that there was still a lot of work to be completed at the time. Now, a builder will not abandon a project in the middle of construction - he has already invested too much money. Knowing that things are turning negative on the demand side, what he will do, instead, is rush every worker available to the sites already in progress, in an effort to complete and sell as many houses as possible, as soon as possible. This is the logical reaction to a dropping market: houses that come late to the market will fetch lower prices. Look at the chart below (click to enlarge): starts have plunged, but units still under construction are high. This can only mean that builders are working hard to finish existing projects already in the pipeline. And that's why construction workers are still at work.

But what the future has in store is another matter altogether. Given the collapse in starts, construction layoffs are going to occur suddenly, too, just as soon as work in progress is finished. And that's when we may see half a million jobs disappear within months.

ADDENDUM: When will the job losses happen?

First a chart - you definitely need to click on it to enlarge and study it. Too many squiggly lines.

The top two lines are starts and completions; they track quite closely, meaning that builders are completing what they started and not really abandoning many projects.

The next two lines present somewhat of a puzzle. The blue line is sales and the pink one units under construction. After tracking for decades, as one would expect, after 1996 sales overtook construction significantly. What happened? It must be that cancellations became a significant factor (figures for sales are reported when contracts are signed and do not adjust for subsequent cancellations).

The green line at the bottom is the most interesting of all: new houses for sale. They are stuck near all time highs, meaning that inventory is a big problem.

OK, let's put it all together, from the jobs viewpoint:

a) New construction activity (starts) is collapsing. Future employment will decline.
b) Sales are approaching the number of units under construction, after being significantly higher. Builders are building fewer buildings, but sales are dropping faster.
c) The result is that inventory is not coming down. Builders will have to do fire sales and cut costs - i.e. cut jobs soon.

When and how much? Given the last three months data on starts, units under construction will probably drop to the 575.000/yr. level by year-end (September was at 675.000). This level is the same as in 1998, when residential construction employment averaged 725.000 jobs (September was at 981.000). So I project a loss of ~ 250.000 construction jobs in the next three months. Furthermore, starts currently are at 1993 levels, when employment was at 580.000 jobs and it seems to me we will drop to that level within another three months, for a total of 400.000 jobs lost in six months.

If starts keep going lower then construction jobs will drop even further.


With all thy knowledge, get going...

I added a strip of finance/economics book recommendations to the right of the blog. I will update them from time to time.


  1. I assume that more than 500000 jobs will disappear. This is due to the fact that building house requires quite a lot support work from logistics, warehousing. Also, it will hit retail as the total amount of salaries will decrease.

  2. Or maybe the jobs data is just wildly inaccurate, which it often seems to be, with later revisions of 10,000s of jobs one way or the other not at all uncommon.

    I find it hard to imagine that the proportion of jobs held by aliens was very much higher in 2006 than, say, 1988-90...

    Really? Why? You're talking 20 years ago, and during that time illegals have been streaming in, to the point that per some estimates there may be 20 million here. The competitive pressures on contractors and subcontractors, who often have to bid on jobs, to hire low cost labor is obvious. So I have no trouble believing that the fraction of illegals working in construction has increased significantly; in fact I would be surprised if it had not.


  3. Agree. Many construction sites around are operating at Saturdays.

  4. Re: illegals

    Look at the first two charts: between 1992-2006 starts doubled and so did reported construction employment. So the ratio of the unreported and presumably illegal workers must not have changed all that much.

    I believe my explanation is closer to what's happening on the ground. Starts are down to 1993-1994 levels but units under construction are still at 2004 levels.


  5. Thanks for the clarification. I guess I just don't see why illegals are necessarily unreported; as I understand it this is just a hypothesis. In fact most have at least a taxpayer ID, others use a phony or stolen SSN. And given lax enforcement over the years, employers really had little to worry about. And still largely don't, e.g. New Orleans.

    My anecdotal experience is that there is a LOT of Spanish spoken on job sites. Which must have some correlation.


  6. As a civil engineer who dabbles in the site development area, my phone has stopped ringing (for both residential and commercial work). We're the canary in the coal mine, so to speak. If we aren't pumping out plans then there won't be any construction in 9-12 months.

    Builders are still building but they don't plan to break any new ground. They just want to get the projects done as fast as they can without losing their shirts. Once they're done, you better believe they'll be construction layoffs.

  7. Thanks for the book recommendations -- much appreciated. Since per your profile you worked in finance after your engineering education, during which I assume you did not read many finance or business or accounting textbooks, or take any (or many, anyway) of those classes, I'd also be interested to know what books you might recommend to get a more academic take on this subject. For example, to learn some of what is needed, theory and practice, to work in finance. It would also be interesting to hear a little more about how you got started in something so different from your academic background, since as a practical matter, e.g. getting a job, not having the appropriate/required academic background is a real 'barrier to entry'.



  8. I would add that smaller builders use mainly independent subcontractors and would not be included in the employment numbers and are squeezed out first in a down turn.
    Eyeballing your charts it seems that the number of employees per housing start seemed to decrease at the recent building peak compared to the previous.
    My WAG is 400,000 missing workers at the latest peak. Possible?

  9. I'm afraid I can't agree completely. We just had a project here in CA in which the builder DID abandon the project - even leaving stacks of tiles on the roofs of unfinished homes.

    No, I think you can sum up some of the reason to a simple number - 1099.

  10. Question for civil engineer...when did the phone stop ringing, about?


  11. Re: Academics...

    Boy, that's not an easy question. I did have formal training in finance, both at college and my subsequent employer at the time (very large inv. bank).

    There are literally dozens of books, from "how to buy stocks" all the way to Graham and Dodd, and even more quant titles dealing with pricing futures, swaps, options, etc.

    If you have access to a good public or college library start there and speak to a librarian.


  12. "I find it hard to imagine that the proportion of jobs held by aliens was very much higher in 2006 than, say, 1988-90...

    Why would you think that? My home was entirely rebuilt last year (06) after a massive fire. Every sub that the gen'l contractor employed was mostly illegals; at least if you can judge by the fact that they spoke no or almost no English (Spanish only). Only the leads on a few knowledge-intensive subs (electric, plumbing) were clearly US born, and even they used people who couldn't understand English to string the wires, lay in the pipes, etc.

    I think around 90% of the work done our house was by illegals (granted, no proof, just indicators). I find it hard to believe that was the case 20 years ago.

  13. About those aliens ... I remember the oil crash in Texas and I worked in California right afterwards. I was in banking, was good at compliance work, and the S&L crisis kept me very busy for years. I saw a lot of construction. It would be fair to say that half or less of the crews at that time were illegal in Texas and California. As of last year when I retired, I was still hitting projects to "visit the money" and because a lot of builders lie like rugs and I have the curse of a suspicious nature. I think at this point awfully close to 100% of the crews building out homes in Dallas, Tuscon, Phoenix, and a bunch of places in California were illegal aliens. There were no -- zero -- US nationals anywhere to be found, ever. Sometimes you could get them to drive out if you threatened them enough. When I see estimates of 22+ million illegal alien wage earners, that would jibe with what I saw. I think that the proportions now are completely different.

  14. Re: Illegals,

    Ladies and gentlemen you are missing the point. It is not as if we have TOO FEW jobs being reported, but TOO MANY.

    I will say it again: the number of housing construction jobs reported by the BLS doubled between 1992 and 2006 and so did starts. So the two tracked, regardless if the jobs went to legals or illegals.

    But now we have starts plunging and jobs are stuck still high. This can only happen if a) BLS is overestimating or b) the workers are still employed as per my explanation, which makes perfect sense given the numbers of units still under construction.

    My point, in any case, is that we will soon see a very rapid decline in these jobs, particularly as the construction season ends in the North and there will be very few jobs in the South/Southwest (many construction workers travel with the weather).

  15. what do you think the lag time is until we see these job losses?

  16. you must be Greek... either that or all the little clues are true accidents of the kind bound to crop up in highly complex environments.

  17. RE: When will we see job cuts?

    I will post some more charts on the blog in a few minutes and try to answer.

  18. Greek?

    Keep 'em guessing, I say... There is more appeal to a deftly obscured persona than to the full exposure. That's what keeps Victoria's Secret in business, too. Smile. Wink, wink. Nod, nod.

  19. wonderful blog. I love how you always confront the obvious that everyone else seems to miss. thanks, Hellasious.

  20. The best explanation of the ridiculously high construction employment numbers is how the BLS models (yes, here we go again) employment. The Birth/Death Model means that BLS is almost guaranteed to miss turning points in employment.

    Here is James Hamilton on the issue and here is the BLS itself from which I quote: As a final note, the most significant potential
    drawback to any model-based approach is that
    time series modeling assumes a predictable
    continuation of historical patterns and
    relationships. Therefore, a model-based
    approach is likely to have some difficulty
    producing reliable estimates at economic turning
    points or during periods in which there are
    sudden changes in trend.

  21. Neumann Homes, Inc., Chicago's 4th largest homebuilder files chapter 11 bankruptcy, fires 85% of its 130 employees. Blamed its demise on the Detroit, Chicago and Denver markets.

    Jason B

  22. I think the disparity in the employment numbers is that there was way more workers in the boom than the labor charts were depicting. The numbers of illegals grew tremendously but were not counted. So as in any downsizing, the workers go first, and then support staff, then management - in that order.

    To date, the companies involved in this industry, have let go of the illegals and keep hoping for the turn (cause they have been hearing for 2 years on CNBC that the bottom will happen next quarter). They don't want to release staff and management because they are trained in their business, perceive there is a very tight job market and they won't get them back.

    The day(s) of reckoning will come when the company leaders can't stand the pain and/or have no more float to carry their people on the bench waiting for things to improve. Who knows when that will happen?

  23. Hellasious:

    Re: Civil Engineer

    The phone calls typically slow down toward the end of the year and they did just that in late 2005 as expected.

    I was expecting them start ringing again with the same fervor in Feb 2006 but they didn't.

    The residential development market work started drying up between early 2006 and mid 2006. No more multiple subdivisions, now its small grading plans for a pool or addition.

  24. Re: Civil Engineer

    Thks vm for getting back with the info.

  25. RE: Civil Engineer

    Hellasious, I forgot to mention that once the phone stops ringing, you have usually between 12 to 18 months of lag when the contractors stop breaking ground.

    My phone stopped ringing Feb 06, so 18 months later is Aug 07. Guess what started happening then?

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