US & WashingtonConstruction Cost Outlook

Presentation to the Sound Transit Board

(System Expansion Committee)

Seattle February 14, 2019

Ken Simonson

Chief Economist, AGC of America

simonsonk@agc.org

Headline Forecast• The US economy is still growing well:

- 304,000 jobs added in January, 2.8 million in past 12 months—the most since ‘15

- consumer, business confidence are generally high; recession probability is low

- but home & auto sales are slowing; trade & fiscal policy concerns continue

• Contractors remain busy and confident; construction employment at 11-year high with growth in most states and project categories

• Three concerns:

- impact of trade policies on materials costs and demand for construction

- widening labor shortage, worsened by hostile immigration policy

- rising interest rates may cut demand for income-producing projects, new homes

Source: Author

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Summary

• Costs for many construction materials have risen sharply in the past two years

• Labor costs are accelerating as pool of experienced unemployed jobseekers dries up

• Contractors want to add workers in 2019 but expect difficulty finding them

• As a result, some contractors are increasing bid prices or completion times

Source: Author

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Prices for key inputs have risen sharply(change in producer price indexes, Nov. 2017-2018 & Nov. 2016-2017)

Source: Bureau of Labor Statistics

3%

0%

13%

8%

42%

3%

9%

6%

20%

20%

0% 10% 20% 30% 40% 50%

Ready-mixed concrete

Paving mixtures

Aluminum mill shapes

Steel mill products

Diesel fuel

November 2017–November 2018 November 2016–November 2017

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-24%

-20%

-16%

-12%

-8%

-4%

0%

4%

8%

12%

2008 2010 2012 2014 2016 2018

12

-mo

nth

% c

han

ge

Construction Employment Change from Year Ago1/08–12/18 (seasonally adjusted)

Washington 4.4%

Source: BLS

5

U.S. 4.1%

12/17–12/18:

Construction employment change by WA metro, 12/17–12/18

6

Over -10%

-5.1% to -10%

-0.1% to -5%

0.1% to 5%

5.1% to 10%

Over 10%

Shading based on unrounded numbers

0%

Source: BLS state and regional employment report

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5.0%

4.0%

0%

1%

2%

3%

4%

5%

6%

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

12-mo % change in construction average hourly earnings

Job openings rate in construction

12/18

Construction job openings rate has been growing as pay accelerates (Dec. data, 2009-18)

Construction workforce indicators (not seasonally adjusted)

Source: Bureau of Labor Statistics

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382,000

219,000

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Hires

Openings

12/18

Construction openings: all-time high; hires steady(Dec. data, 2009-18)

US/WA Net % who expect dollar volume of projects to be higher

14%/38% Transportation (e.g., transit, rail, airport) 14%/11% Water/Sewer

17%/12% Public building 13%/0% Private Office

16%/12% Highway 12%/8% Manufacturing

16%/13% Hospital 11%/9% Higher Education

16%/6% K-12 school 10%/13% Power

15%/5% Federal (e.g., VA, GSA, USACE, NAVFAC) 5%/-6% Multifamily Residential

15%/12% Retail, Warehouse, Lodging

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8

AGC members’ expectations for 2019—US & WA

Source: AGC 2019 Outlook Survey, Jan. 2019

Rising materials and labor costs may portend higher bid prices

Sources: Highway contract prices: Federal Highway Administration, National Highway Construction Cost IndexConst. pay and materials, services cost: Bureau of Labor Statistics, Current Employment Statistics, Producer Price Index

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-3.0%

0.0%

3.0%

6.0%

9.0%

12.0%

15.0%

Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018

Cumulative change in highway bid prices and input costs, Dec. 2015–Sep. 201812-month % change, not seasonally adjusted

Const. wages & salaries

Cost of construction materials & services

Highway contract prices

AGC Outlook Survey: WA contractors expect to add workers but are having trouble finding them

Source: AGC 2019 Outlook Survey, Jan. 2019

10

55%

75%

77%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Will be hard/harder to find workers in 2019

Having trouble filling positions

Expect to add workers in 2019

AGC Outlook Survey: WA Firms with staffing challenges face higher costs and delays

Source: AGC 2019 Outlook Survey, Jan. 2019

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20%

27%

29%

16%

0% 5% 10% 15% 20% 25% 30%

We've put longer completion times intobids/contracts

Projects have taken longer than we anticipated

We've put higher prices into bids/contracts

Costs have been higher than we anticipated

2017-2018 US summary and 2019 forecast

*Jan.-Nov. 2017 to Jan.-Nov. 2018

2017actual

2018actual

2019 forecast

Total spending 4% 4.5%* 5-8%

Goods & services inputs PPI 4.4% 3.8% 4-6%

Wages & salaries (avg. hourly earnings)

3.1% 3.6% 3.5-4.5%

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AGC economic resources(email simonsonk@agc.org)

• The Data DIGest: weekly 1-page email (subscribe at http://store.agc.org)

• monthly press releases: spending; producer price indexes; national, state, metro employment with rankings

• yearly employment & outlook surveys, state and metro data, fact sheets: www.agc.org/learn/construction-data

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