How Construction Fuels the Economy

How Construction Fuels the Economy

The construction sector impacts the economy in many more ways than people appreciate. Most folks understand that things like construction investment, jobs, and wages are important economic drivers, but that’s really just the surface level of all the widespread activity that takes place each time a new project is established.

We wanted to learn more about how far the industry’s impact goes, so we reached out to Dewey Pearman, executive director of the Construction Advancement Foundation (CAF), with several questions about the frequently underestimated economics of construction.

 


For every 100 jobs created in the construction industry:

88 additional jobs are created among goods and services providers.

138 additional jobs are created as construction workers spend their earnings.

Source: Economic Policy Institute, January 2019


 

Dewey Pearman

Building Indiana (BIN): What are some of the behind-the-scenes connections between the Indiana construction industry and economic growth that people may not realize?

Dewey Pearman, Executive Director, CAF: “Construction has important and significant connections to other sectors of the broader economy. These connections are often referred to by economists as backward linkages and forward linkages.”

“Backward linkages refer to the relationships one industry has to firms that supply materials and services for the performance of its output. Examples of backward linkages for the construction industry include firms that supply concrete, steel, copper, lumber, equipment, tools, legal and accounting services, and the like. Forward linkages refer to those businesses a firm’s employees choose to spend their income. Examples include grocery stores, auto dealers, restaurants, retail stores, and professional services such as doctors and dentists.”

“A report prepared by the Economic Policy Institute (January 2019) titled Updated Employment Multipliers for the U.S. Economy quantifies these linkages across industries. The report shows that for every 100 jobs created in the construction industry 88 additional jobs are created through the backward linkages to goods and services providers and 138 additional jobs are created through forward linkages as construction workers spend their earnings in the local economy. These numbers demonstrate that construction industry activity in a given market has a significant impact in that market’s broader economy through the creation and support of jobs both forward and backward linked businesses.”

 

 

BIN: When the construction sector is experiencing challenges, as it has been these last few months, what kind of effect does this produce on investment from other industries?

Pearman: “The construction industry has, indeed, struggled with challenges in the past year, or so. There are two principle issues the industry is wrestling with at the moment.”

“First, the increased cost of construction has a significant impact on firms making capital investment decisions. As an example, data published by ENR (Engineering News Record) shows material costs increased by 1.6% in July, up 27.9% year over year. This included an increase in the cost of cement by 3.2% in July and 9.3% year over year, an increase in the cost of steel of 1.6% in July and 38.6% year over year, and a 12% increase in lumber in July with a 16.2% increase year over year.”

“For contractors to remain viable these costs must ultimately be passed to the end users. These increasing costs make some investments in projects economically unfeasible in the near and median term.”

“The second challenge the construction industry is currently facing is the availability of skilled labor. Job openings in the non-residential construction sector at the end of April were at 494,000, up 40% from April of 2021. While 455,000 skilled construction workers were hired in April, contractors would have hired twice as many workers during the month had they been available. The result is there are more projects underway than the industry has the capacity to build. Here again, the end users are likely to face increasing costs as well as construction delays.”

 

 

BIN: As the U.S. continues its economic recovery over what many expect to be a bumpy few years ahead, what role do you think the construction industry will play in the recovery process?

Pearman: “Construction is an investment goods industry. That is, the construction level of business activity is based on the level of investment being made to create long-term output capacity for firms in consumption goods and services industries, as well as public infrastructure. While firms in consumption goods and services industries can quickly respond to actual or expected changes in consumer demand by quickly scaling their output up or down, investments goods industries such as construction face much greater instability of demand for their output. Investment demand discussions are made on a long-line horizon based on more distant future expectations. Thus, these decisions are inherently more uncertain and unstable.”

“The extent of the construction industry’s role in the economic recovery process is directly linked to decisions made by both private sector decision makers about the need to add future output capacity to their businesses as well as public sector decisions regarding public infrastructure investments. With the high level of capital investment expected in the nonresidential construction market in 2022 and 2023, the industry expects robust activity over the next several years. Given construction’s forward linkages to the broader economy, public and private capital investment decisions can be a significant role in the economic recovery.”

 

 

BIN: What type of economic or policy changes might be possible to strengthen the construction sector over the near future?

Pearman: “The near and median term issue impacting the construction industry is not a lack of projects. The issues which could slow construction activity in the next year or two relate to the industry’s ability to meet demand.”

“The biggest challenge facing the industry is worker availability. As noted earlier, in May 2022 the nonresidential sector of the construction industry had a shortfall of almost a half of a million workers. As significant infrastructure projects start up because of the Infrastructure Investment and Jobs Act and numerous large-scale manufacturing commercial and health care jobs ramp up, this shortfall is expected to grow significantly.”

“Efforts are need by public officials to help the industry in the recruitment and training of skilled craft workers. The recently announced effort by U.S. Department of Labor to build the Apprenticeship Ambassador Initiative is a step in the right direction. Similar efforts by state and local government agencies could greatly assist in these efforts. Additionally, local school systems could assist the industry in promoting the skilled trades as a desirable career path to high paying careers and by putting in place robust build trades class in the career and technical education programs.”