Sharing the Pain of Unemployment: Part 2, The Importance of the Building Trades

Last Updated May 10, 2010 11:34 AM EDT

The headline rate of unemployment rose in last week's report for April, but it's not all bad news. Numbers of people working, not working and looking for work all went up, but in proportions that took the overall ratio to 9.9 percent, versus 9.7 percent in March. Jobs in both the goods and services sectors increased, and numbers were positive for most industries.

One area that is still suffering, despite some increases in the last couple of month, is construction, where the rate of unemployment is nearly 22 percent. Construction has been an important part of past expansions, with a boost of a million or two jobs -- what is the outlook this time around?

A while ago I wrote about how a large portion of the employment decline had fallen to workers in the goods sectors. (That was Part 1 of "Sharing the Pain of Unemployment;" thanks to the many people who read it.)

Today I want to look in detail at the construction sector, part of the goods producing group, along with manufacturing and mining. This graph illustrates the employment picture in this group back to before WWII, and shows the long-term decline in jobs for people that make things, and the cyclical growth of the building trades.

Click on the graph for a larger image
Note that those are not percentages -- that's the number of people. Compare it to the same graph for the services sector, where all the growth has been.

And here are the numbers for the current downturn. Since January 2006, the goods sector has lost 20 percent of its jobs, while the services sector has lost just one percent. Within services, gains in health and education jobs have offset large losses in information services and retailing.

Construction today employs 5.6 million people. The latest government reports tell us that nonresidential construction employment has turned up this year, homebuilding is still shrinking. Here's a report from

In contrast [to nonresidential], the residential construction sector slipped by 4,000 jobs in April after experiencing marginal increases the previous month. Year-over-year, residential construction employment is down by 76,200 jobs, or 11.6 percent. Total construction employment grew by 14,000 jobs in April, though is still down by 554,000 jobs, or 9 percent, compared to the same time last year. The national unemployment rate for the construction industry in April now stands at 21.8 percent, down from 24.9 percent in March, but still higher than 18.7 percent in April 2009.
In past recessions, we've been able to count on housing as a source of growth. It's been a sure-fire tool for the government to get things going -- they cut interest rates, make mortgages and construction loans cheaper, and start people working building homes, and making new refrigerators and stuff.

But housing is so distorted now, thanks to the persistent easy money of the last 10 years, that a recovery in home building is far off. Not to mention the growth in jobs or a million or two that has come in past cycles -- that's as much as 1.5 percent of the labor force.

The problem is not just a cyclical decline, contends Dave Rosenberg of Montreal money managers Gluskin Sheff:

Even though housing starts have been cut all the way down to around 600,000 units at an annual rate, historic lows indeed, the lingering problem is that we still have too much supply...
...[W]e are talking about anywhere from 16 to 21 months [supply] when the foreclosed pipeline 'shadow inventory' is included - 4-to-5 times larger than a typical balanced market.
Meanwhile, ... the house-buying intentions segments of the various consumer confidence surveys, are still flirting with record lows. The demographics are also awful with net household formation running at 900,000, or less than half what we were seeing during the boom times just five years ago...
Plus, one of the aftershocks of the "Great Recession" has been a return to a higher average family size - the "bundling up" effect - for the first time in a century. Even counting in obsolescence of the housing stock, absorbing the vacant housing inventory under the current demographic profile could take at least a decade. You heard that right, housing is in secular decline.
And my blogging colleague Calculated Risk has put some numbers to it, and is more positive about the bottom line:
The good news is the population is growing at around 2.6 million people per year. And based on normal household formation to population ratios, this would usually mean 1.1 million or more net new households formed in 2010. Unfortunately job growth will probably be weak in 2010 and hold down household formation, but this suggests the number of excess units should finally start declining in 2010 - perhaps by more than 600 thousand units, perhaps even cut in half.
It looks like it will be a long time before those important construction jobs come back.