1. Construction Spending, Labor & Materials Outlook October 15, 2014 Ken Simonson Chief Economist, AGC of America simonsonk@agc.org

2. Construction spending & employment, 2006-14 2Source: BLS, Census Bureau construction spending reports2 12-month % change, Jan. 2006-August 2014 8/14: $961 bil. 12-month % change, Jan. 2006-August 2014 8/14: 6,063,000

3. Construction is growing, but unevenly 3 trends helping many sectors and regions: ‘Shale gale’ Panama Canal expansion Residential revival, especially multifamily 3 trends holding down construction growth: Government spends less on schools, infrastructure Consumers switch from stores to online buying Employers shrink office space per employee 3Source: Author

4. One (or many) bright spot(s): the shale ‘gale’ 4Source: U.S. Energy Information Administration Haynesville Eagle Ford Bakken Marcellus Niobrara Permian

5. Shale’s direct and indirect impacts on construction Onsite: Each well requires access road, site prep, pad, storage pond, support structures, pipes Nearby: Products, water require trucking, rail, pipeline, processing Local spending by drilling firms, workers, royalty holders Upstream: orders for fracking sand, rigs, compressors, pumps, pipe, tanks, trucks, railcars, processing facilities Downstream: Petrochemical, power, steel plants; LNG export terminals, fueling stations; LNG-powered vehicles Losers: coal; maybe wind, solar, nuclear & suppliers 5Source: Author

6. U.S. ports affected by Panama Canal expansion 6Source: U.S. Army Corps of Engineers Baltimore NY-NJ Norfolk Seattle & Tacoma Charleston San Diego Oakland Miami Savannah Jacksonville Mobile Columbia River at Mouth, OR & WA Los Angeles/ Long Beach New Orleans Houston

7. Panama Canal expansion’s impacts on construction Ports: investing in dredging, piers, cranes, land access Nearby: Storage, warehouse, trucking, rail facilities Bridge, tunnel, highway improvements Inland: possible changes in distribution, manufacturing 7Source: Author

8. Private residential spending: MF still soaring, SF slowing 8 Private residential spending, Jan. 2011-August 2014 (billion $, SAAR) Multifamily (MF) Single family (SF) Improvements Improvements: -10% Single family: 8% Multifamily: 36% Total: 4% Source: Census Bureau construction spending reports 12-month % change, Jan. 2011-August 2014

9. Housing outlook SF: rising for now but tight credit, fear of lock-in, demographic shifts may limit increases MF: Upturn should last into 2015 – Vacancy rates near multi-year lows in most cities – Preference for urban living adds to demand – Condos have been slower to revive than rentals – Government-subsidized market likely to worsen Improvements: should generally track SF sales 9Source: Author

10. 8/14 Total2013 vs. 20122014 Forecast Nonresidential$604billion % 4-8% Power (incl. oil & gas structures, pipelines) 102 -7 10+ Highway and street 8310 to -5 Educational 79 -8 0 to -5 Manufacturing 57010+ Commercial (retail, warehouse, farm) 5580 to 5 Office 4400 to 5 Transportation 40 52 to 5 Health care 39 -2 0 to -5 Sewage and waste disposal 24 -3 Amusement & recreation 170 Lodging 162510+ Other (Communication; water; public safety; conservation; religious): 8% of total -2 Nonres segments, 2013 & 2014 forecast (billion $, SAAR) 10Source: Census Bureau construction spending report; Author’s forecast

11. Construction spending: public works (billion $, SAAR) 11Source: Census Bureau construction spending reports Highways (99.94% public) Amusement & recreation (58% public) Sewage/waste (99% public) Water supply (95% public) Latest 12-mo. change: -0.2%Latest 12-mo. change: 4% Latest 12-mo. change: 2% Latest 12-mo. change: -2%

12. Construction spending: industrial, heavy (billion $, SAAR) 12Source: Census Bureau construction spending reports Power (88% private) Transportation facilities (72% public) Manufacturing (99% private) Public & private transportation facilities Latest 12-mo. change: 16% (private 17%; public 10%) Latest 12-mo. change: 3% Latest 12-mo. change: 14% Latest 12-mo. change: private 3%; public 3% Public Private

13. Total education (79% public) Construction spending: institutional (private + state/local) 13Source: Census Bureau construction spending reports Total healthcare (74% private) Education (state & local K-12, higher; private) Hospitals (private, state & local) Latest 12-mo. change: 2% Latest 12-mo. change: -7% Latest 12-mo. change: private -5%; state & local -16% S/L preK-12 Private S/L higher ed S/L Private Latest: state/local preK-12 -4%, higher 6%; private -1%

14. Construction spending: developer-financed (billion $, SAAR) Source: Census Bureau construction spending reports Retail (private) Warehouse (private) Office (80% private) Lodging (private) Latest 12-mo. change: 3% Latest 12-mo. change: 48% Latest 12-mo. change: 10% Latest 12-mo. change: 19% (private 19%; public 20%) Private Public Total

15. -2% 4% 1% 6% 0% -1% 2% 13% -4% 4% -0.5% 9% -2% 2% 4% 3% 4% 3% -0.4% 7% 3% 6% 3% 6% -0.4% -7% 3% -1% 1% 5% 3% 4% 12% 7% -5% 6% 11% HI -0.3% 2% VT 5% CT 6% RI 4% DE 11% NJ -8% MD 4% DC -1% NH 0% Over -10%-5.1% to -10%-0.1% to -5%0.1% to 5% MA 0.2% State construction employment change (U.S.: 3.9%) 8/13 to 8/14: 36 states up, 12 + DC down 5.1% to 10%Over 10% Shading based on unrounded numbers 0% Source: BLS state and regional employment report 7%

16. Construction employment, Aug. ‘14 vs. peak US:construction -21% (-1.7 million) below Apr. ‘06 peak States: La. and N.D. at new peak in 2014, 43 states > 10% below Metros: only 31 of 339 at new July peak, not seas. adjusted 16 F Peak in 2014 Within 10% of peak >10% below peak Source: Author, from BLS national and state & area employment data (www.bls.gov/ces. www.bls.gov/sae)www.bls.gov/ceswww.bls.gov/sae

18. Spending +21% but jobs only +10%. How do they do it? Contractors charging more: PPI +11% (nonresidential buildings) More hours per worker: aggregate hours +14% (+3% per employee) Implication: further spending growth will trigger larger pickup in hiring—but will workers be available? 9% real Construction spending, labor & prices, 8/10-8/14 21% total 11% price change Source: Author, from Census Bureau (spending), BLS (employment, hours, PPI)

19. Change in construction (un)employment, 9/10-9/14 Construction unemployment fell sharply in past 4 years But industry employment rose much less Thus, workers left for other sectors, school, retiring 19Source: Author, from BLS Unemployment rates (Not seasonally adjusted, Sept. 2010-Sept. 2014) Change in unemployment & employment (Not seasonally adjusted, Sept. 2010-Sept. 2014) 284,000 Workers who have left industry

20. Hardest positions to fill (% of respondents who are having trouble filling) 20 Source: AGC Member Survey, Jan. 2014 Craft Equipment operators48% Carpenters44 Laborers37 Professional Project managers/supervisors48% Estimators41

21. Material & labor costs vs. nonresidential building prices 12/10-8/14 21 Source: Author, based on Bureau of Labor Statistics for Producer Price Indexes (PPIs) and Employment Cost Index (ECI); Federal Highway Administration for NHCCI ECI (empl. cost) 6/13-6/14: 1.3% PPI for nonres buildings 8/13-8/14: 3.3% PPI for materials 8/13-8/14: 1.7% 12/10

22. Producer price indexes for key inputs, 12/10-8/14 (Dec. 2010=100) 22Source: Author, based on BLS producer price index reports Steel mill products Gypsum products Copper & brass mill shapes Lumber & plywood Latest 1-mo. change: 0.3%, 12-mo.: 4% Latest 1-mo. change: -0.9%, 12-mo.: 8% Latest 1-mo. change: -0.7%, 12-mo.: -1% Latest 1-mo. change: 1.5%, 12-mo.: 11% 12/10

23. Producer price indexes for key inputs, 12/10-8/14 (Dec. 2010=100) 23Source: Author, based on BLS producer price index reports Plastic construction products Concrete products Asphalt paving mixtures & blocks Latest 1-mo. change: -0.3%, 12-mo.: -4% Latest 1-mo. change: 0.5%, 12-mo.: 2% Latest 1-mo. change: 0.5%, 12-mo.: 4% Latest 1-mo. change: 0.8%, 12-mo.: 2% Diesel fuel 12/10

24. Best prospects for 2014-15 Multifamily Manufacturing, esp. petrochemical, oil/gas supply Oil & gas fields Pipelines Warehouses Lodging (hotels & resorts) Rail Data centers 24Source: Author

25. Trends: 2014-2017 Total construction spending: +6% to +10% per year – less SF housing, retail; declining public spending – new drivers: shale-based gas & oil; Panama Canal widening; more elderly & kids, fewer young adults Materials costs: +1 to +3% (similar to CPI); rare spikes Labor costs: +2.5% to + 5% Labor supply: widespread shortages possible due to retirements, competition from other sectors, fewer vets 25Source: Author

26. Summary for 2013, 2014-17 26Source: 2012: Census, BLS; 2013-17: Author’s ests. 2013 actual 2014 forecast 2015-17 ann. avg. forecast Total spending6%6-9% 6-10% Private – residential20%6-10% 1-10% – nonresidential1%12-15% 1-10% Public-3%-1 to +2% 0 or less Materials PPI1.3%1-2% 1-3%; rare spikes Employment cost index2.0%1.5-2.5% 2.5-5%

27. AGC economic resources (email simonsonk@agc.org)simonsonk@agc.org The Data DIGest: weekly 1-page email (subscribe at www.agc.org/datadigest)www.agc.org/datadigest monthly press releases: spending; PPI; national, state, metro employment state and metro data, fact sheets website: http://www.agc.org/Economics http://www.agc.org/Economics webinars: Nov. 20 (email for details) 27