This article is Part 1 of a two-part series titled, Predicting the Next Economic Correction. Part 1 includes discussions associated with construction output via GDP as it relates to both state GDP and US GDP, while Part 2 includes the development of a simple model using construction material and labor costs as a predictor of the pending economic correction in the United States. Part 1 is available herein, and Part 2 is available separately.
Construction Output and its impact on the Economy, Predicting the Next Economic Correction
Herbert M Barber, Jr, PhD, PhD
The US construction industry has served as a source of economic livelihood in America for generations, even before the existence of the United States of America. The construction industry is responsible for the planning, design, construction, and maintenance of 1) infrastructure, including highways, roadways, bridges, dams, waterways, reservoirs, maritime ports, airports, hospitals, schools, energy plants, and energy grids, 2) industry, such as pulp & paper mills, saw mills, chemical plants, pharmaceutical facilities, oil refineries, and manufacturing plants, 3) business facilities, such as high-rise buildings, office buildings, parking garages, shopping malls, and stores, and 4) housing, including single family dwellings, multi-family dwellings, and the like.
In fact, through the construction industry most other sectors exist, altogether, at least in some form. As such, construction spending has long been viewed as an indicator of economic output, with some variables within the construction industry proving to be conducive to being termed an economic indicator, while other variables have been discounted as realistic indicators.
For example, many economic researchers use the US housing market as an economic indicator as a predictor of economic output, and such is not completely without merit. Unfortunately, however, using the housing sector as an indicator of economic output while completely negating other variables within the construction industry often proves unwise, as the housing sector is but a tiny portion of construction spending. In fact, spending within the housing sector is nearly negligible when compared against construction spending on real construction projects, such as the multi-billion-dollar construction projects in industry and infrastructure. To make a point, consider costs associated with the $14 billion construction project at Plant Vogtle, one of the nation’s leading nuclear power plants, or costs associated with the recent $23 billion Big Dig tunnel project in Boston. Now, compare cost variables, including actual cost and type of cost, with these projects with those of simple home construction. Projects such as the Vogtle and Big Dig projects typically have serious implications on the US economy, some good, and some not so good. In fact, the relationship between output generated in the US construction industry and US economic output has far reaching implications across a host of constructs; again, some good and some not so good.
“The construction industry is extremely sensitive to outside influence, and dynamics within the industry are complex [hence the reason residential construction is a weaker predictor]. These complexities are exacerbated further when attempts are made to leverage the construction industry as a catalyst for economic output, or vice-versa.” Generally, the relationships between output generated in the construction industry and output generated in other industries, and subsequently the US economy, can be viewed through the following construction-economics nexus model: