By Ed Zarenski, Construction Analytics
This plot is not showing good performance. Volume and jobs should be moving directly in tandem. When inflation is very high, spending climbs rapidly. But most of the climb is just due to inflation. To find out what’s really going on we need to look at business volume.
Business volume = Spending minus Inflation. Inflation adds nothing to business volume. Inflation adds only to the amount of revenue that changes hands.
In 2022, residential spending is up 16%. Sounds great, home builder’s revenues are up 16%. It’s great until you note that residential inflation for 2022 is 15%. Real residential business volume for 2022 increased only 1%.
Since Jan.2020 spending is up 20%. Revenues are up 20%. It’s pretty hard to not think you need additional staff to support 20% growth in revenues. But inflation is 30%. Take out the inflation dollars and we find that volume is DOWN 10%. Well, during that time, jobs increased 1-2%. And yet, business volume is down 10%. That’s a massive 11%-12% loss in productivity. With labor being about 35% of the total cost of a job, that’s added about 4% to total inflation.
Since Jan 2020, the construction industry as a whole has nearly +175,000 (+2%) more workers to put-in-place -$175 billion (-10%) LESS volume. That’s a huge loss to productivity that may take years to recover, if ever.
About the author:
Ed Zarenski retired (well, semi-retired) in 2014 from a 42 year career in construction, 30 of those years as a building project cost estimator and construction economics analyst. He now spends his time as a construction economics analyst, author, educator and presenter. Upon retirement he focused on two life-goals; providing unique construction economics reporting and teaching, which he was fortunate to do at Worcester Polytechnic Institute. He created the blog Construction Analytics as a place where his readers can find in-depth, behind the headlines commentary related to the economics of building construction. This article was originally published on December 3, 2022, and is reprinted with his permission.
