Is the Strong Jobs Report ‘Terrible’ for Construction?

Dive Brief:

• Construction added a total of 19,000 jobs in September, with the bulk of those gains coming on the nonresidential side, signaling that the Federal Reserve’s aggressive interest rate hikes have yet to quell demand for hard-to-find workers in the sector.
• Overall construction unemployment dropped to 3.4%, below the national rate of 3.5% for all industries, as nonresidential builders added 13,100 positions for the month and 181,500 for the year, a 4.2% gain from 12 months prior, according to an analysis of Bureau of Labor Statistics data conducted by Associated Builders and Contractors.
• But the gains in the overall job market worried Wall Street on Friday, since they indicate the Fed may need to get even more hawkish in its campaign to reign in runaway inflation. “Today’s employment report was terrific, which in this upside-down, inside-out economic environment means that it was truly terrible,” said ABC Chief Economist Anirban Basu on Friday.

The still hot job market is fuel for even more inflation, since workers can bargain for higher wages.

“Not only does that help support additional inflationary pressure, but it also sends a signal to Federal Reserve policymakers that further aggressive rate tightening is necessary,” Basu said. “If rates rise too dramatically, and they have already expanded substantially, the recovery in nonresidential activity would likely buckle.”

Yet, the current outlook from nonresidential contractors is still largely optimistic.

“Despite rising borrowing costs and elevated risk of recession, most contractors remain upbeat,” said Basu. “Backlog remains stable, and many contractors expect rising sales, employment and profit margins over the next six months. Many contractors also continue to report operating at capacity. Their primary issue is not insufficient demand for construction services, but rather a lack of access to skilled craft professionals.”

That confidence could start to wane, however, if the impacts of the Fed’s rate tightening become back-end loaded. The true effects of rising rates may only be felt months down the road. That possibility worries some market watchers that the Fed has already tightened too much, and that additional hikes could send the economy spiraling.

An additional report that came out this week indicates that cooling is already underway in the architecture, engineering and construction space. The latest quarterly market forecast from Newton, Massachusetts-based AEC consultant PSMJ Resources indicates proposal activity is already slipping.

With any value above 0 indicating increased proposal activity, PSMJ’s latest proposal activity index for the third quarter came in at 25, marking a steep decline from its 60.2 value in Q1, when the benchmark hit its second highest value ever. Most noticeable was the impact on public markets, which have fared surprisingly well thus far.

“This latest data continues to show cooling from record-setting levels of activity in key private-sector markets such as housing,” said PSMJ Director Gregory Hart in a statement emailed to Construction Dive. “But what is more concerning is some of the cooling that we are also starting to see in public-sector markets.”