Construction jobs poised to be next victim of rate hikes

Construction jobs are set to become the next victim of high interest rates as the housing backlogs that have helped keep demand for workers steady start to diminish.

Record wait times for home construction have until now kept overall building activity elevated even as soaring borrowing costs over the last year have severely limited new projects. That's left many construction firms struggling to attract and retain labor while other sectors like technology and finance have cut jobs.

But the tide seems to be turning as the number of housing projects waiting for completion has begun to fall. That means the popular notion that any downturn this year will be mild by historical standards as firms seek to "hoard" labor is about to be put to the test.

"If you were to do the typical math of how weak construction jobs should be right now based on investment in structures spending, it's pretty bad," said Sarah Wolfe, an economist at Morgan Stanley in New York.

The U.S. construction sector shed a net 9,000 jobs in March, marking the first decline in 14 months after employment rose to a record 7.9 million in February, according to Labor Department figures. Construction layoffs jumped to 3.7% of total employment, up from 2.3% in February, marking one of the biggest leaps on record in data beginning in 2000.

Because the housing market is so sensitive to interest rates, it tends to serve as a harbinger for changes in economic activity when the Fed tightens or eases. Going into the Great Recession of 2008 and 2009, construction employment plunged by 1.5 million, leading job losses in the wider economy.

Now, even as the monthly count of new projects seems to have bottomed out in recent months following last year's 24% decline, the total number of units under construction is only just starting to turn lower, raising the prospect of more job losses ahead.

"That's likely to continue for the rest of this calendar year," said Robert Dietz, the chief economist at the Washington-based National Association of Home Builders, referring to the downturn in building activity. "The trend here is real."

Still, there are plenty of differences between this episode and the Great Recession. While many experts see layoffs mounting in the months ahead as construction activity sags, improving demand for homes amid ongoing constraints in supply — partly due to labor shortages — should ultimately limit the job-market fallout.

"Even during times of economic tumult, many contractors are clinging to their workers knowing that if activity begins to rebound, it will be difficult for them to rehire those types of workers," said Anirban Basu, the chief economist at Associated Builders and Contractors.

Brendon Thorne/Bloomberg

'Lack of People'

That view is informed in part by what's happening on the ground in the industry. Dave Chapin, the president of Willmar Electric, is one example of a contractor who has been struggling to attract and retain labor in recent years as construction has boomed.

Chapin, whose company specializes in nonresidential electrical work mainly in Nebraska, Oklahoma and Minnesota, said he's raised compensation by as much as 20% since the start of the pandemic, adding that "there continues to be projects that come up and we're turning down work because of a lack of people."

Employment costs rose by the most on record in the first three months of 2023 as employers continued paying up for talent, according to Labor Department figures. A diminished pool of available workers, in part due to insufficient training and restrictions on immigration — one in four employees in construction are foreign-born — is raising hopes that the coming layoff wave won't look anything like 2008.

"We're definitely thinking that labor hoarding is going to minimize some of the downsides," said Wolfe at Morgan Stanley.