Slack in resi construction industry holds back jobs growth

The story of continuing weakness in US construction labor markets seems puzzling. Construction payrolls hit a new multi-year low (discussed here), yet both housing starts and construction spending have picked up.

Merrill created a chart that shows construction jobs as percentage of housing inventory in the US. That ratio is at the lowest level since recordkeeping began.

Source: Merrill Lynch 

Merrill argues that it's a sure sign of construction payrolls bottoming out.

Merrill: - One way to gauge the amount of potential construction hiring is to compare construction jobs to the housing stock. Naturally, the housing stock has grown at a slowing pace over the past several years given the sharp decline in the pace of new construction. But we believe the decline in construction jobs was excessive – the ratio of construction jobs to the housing stock is at a record low (data go back to 1965), just slightly below the troughs of prior housing cycles. This suggests construction companies are operating with reduced headcount relative to prior downturns.

They are probably correct, but it seems the industry may have sufficient slack to increase output without significantly increasing payrolls. Here is a simple exercise. Let's take residential construction spending in the US, adjust it for inflation and see how many resi construction payrolls are deployed per one million dollars in spending. For example if we spend $24bn per month on residential construction and resi construction payrolls in the US are 560K, that represents 23 workers per $1 million spent in a month. The lower the number of workers, the more "headcount efficient" the industry is.

Spending in 2011 dollars

The industry seems to be improving its efficiency in recent months, but still has a great deal of room to go. Construction was most efficient during the building peak in early 2006. That's because the sheer volume of homes under construction allowed for high efficiency (just as most industries become more efficient with increased volumes). This tells us that the industry indeed has some slack and can increase output without proportionally increasing payrolls. Which means that if construction booms in 2013 (as many expect it), jobs will certainly increase but at a much slower pace (at least initially).

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