Retirement

Construction Jobs Changes Reflect Gradual Shift In Economic Activity

Economic activity – growth and job creation – has remained remarkably strong for several years now. That resilience in the face of substantial headwinds such as higher interest rates and rising oil prices likely comes from a gradual shift in what is driving the economy. Much of economic growth since the start of the pandemic was carried by more consumer demand, fueled by pandemic relief legislation enacted in 2020 and 2021. As that extra boost to consumer demand disappeared, economic activity has gradually shifted to more investment spending by businesses and state and local governments. The composition of construction employment is one key area, where that shift is visible.

Construction employment falls roughly into three categories. Those include residential construction, non-residential construction and heavy engineering. Residential construction includes the work on single and multifamily housing. Non-residential construction comprises work on office building, manufacturing plants, new mines, among other commercial and government buildings. Heavy engineering refers to infrastructure related activities on roads, bridges, utility lines, canals and others.

Construction is a cyclical industry. It makes up a relatively small share of total economic growth and employment on average. But, it plays an outsized role during recessions and the early stages of an economic recovery. An economy will in general go the way the construction sector goes. Declining construction activity and employment will sharply increase the chance of a recession, while rising construction activity will raise the chances of a robust recovery.

Importantly, construction employment has grown slightly faster than overall job growth since the start of the pandemic in March 2020. Construction employment grew from 5.0% of total employment in February 2020 to 5.2% in March 2024. In a remarkably strong labor market, construction jobs have been a particularly bright spot. The resilient recovery of the past four years has in part rested on the persistent strength of this sector.

But, construction is not a monolith. An economy that is largely driven by consumer spending should see stronger growth in residential construction employment than in non-residential construction and heavy engineering. People buy new houses and apartments. They also hire contractors to update and expand existing houses. In comparison, an economy, in which businesses and governments increase their investments should see faster growth in nonresidential construction and heavy engineering. Businesses are hiring more people to build factories, for instance, and governments hire more people to repair roads and bridges and update utility lines, among other things. These types of investments lay the foundation for stronger long-term growth in addition to buttressing the current economic expansion.

Construction employment changes show two different economies over the past few years. First, employment in residential employment grew faster than nonresidential and heavy engineering employment. Throughout 2022, non-residential and heavy engineering employment accelerated while the growth of residential construction decelerated. By January 2023, the year-over-year growth of nonresidential and heavy engineering employment outpaced residential construction employment (see Figure below). As a result of these changes in growth patterns, the share of nonresidential construction and heavy engineering employment out of total construction jobs has increased from a low of 58.3% in May 2022 to 59.2% in March 2024.

The changing composition of construction employment reflects gradual changes in overall economic activity. Consumer spending, especially on consumer durables such as recreation equipment, carried the initial recovery from the depth of the pandemic induced recession. Boosts to people’s incomes from pandemic relief measures ended in late 2021. Households then gradually exhausted the extra savings they had built up. They also spent less on housing in the face of rising interest rates starting in 2022. By that time, though, spending from the Inflation Reduction Act of 2022 and the bipartisan Infrastructure Investment and Jobs Act of 2021 started to kick in, offsetting the weakening momentum in residential construction. Manufacturing construction shot up as did state and local government investments. The dynamics of construction employment are just one clear sign of the gradual changes the U.S. economy has been undergoing — from consumption to investment. The result is resilient economic growth that lays the foundation for faster growth down the road.

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