Construction Industry Braces for Impact

**Economic Ouptut, Poised for Decline**

Herbert M Barber, Jr, PhD, PhD

Xicon Economics

The US construction industry has withstood the test of time. As need has increased over every industry sector, the construction industry has stood in the gap over the decades to plan, design, and construct facilities, roadways, highways, bridges, damns, airports, power plants, manufacturing plants, office buildings, and a host of other structures. Suffice it to say, engineering and construction professionals should be proud, as civilizations have literally risen and fallen upon their backs—so much so that we can comfortably presume that the construction industry will never fade into oblivion—at least if there is a US economy.

However, in 2007 and 2008, we quickly learned just how fragile that relationship may be on occasion. Over the course of a few days we learned just how dependent the construction industry is upon the US economy, or economic output. Certainly, the construction industry plays a part in growing or shrinking the US economy, but simultaneously, the construction industry is dependent upon the US economy. This relationship is, as we say, bi-directional—or likely bi-directional, as we have not run calculations to prove such for this paper.

So, what did we learn from the 2008 economic collapse? What did the construction industry learn? Or, conversely, did we learn anything? Are we merely at the mercy of the US economy? Well, yes and no. If we were in fact at the economy’s mercy, of course, that relationship we discussed would be uni-directional, and we just claimed it to be bi-directional. Well, let me share with you what I learned in 2008.

I have spent a lifetime learning. From kindergarten through university, I have learned, and then some. My office walls are full of diploma after diploma, all positioned nicely along the wall beside my lightly stained large walnut desk. I see them every day, perfectly situated between two sconces, and sometimes as I sit, I ponder, “All this education, 34 years, and what have I learned?” Well, let me tell you what I learned during the 2008 economic collapse. Plain and simple. Trust my calculations. Trust my models. Trust my projections; trust my forecasts. Indeed, it is funny; as an engineer, we trust wl2/8 all day long to calculate the moment on a simply supported, uniformly loaded beam, or conversely, we trust the idea of adding up the areas under the shear curve to calculate the moment. We even trust the idea of cutting sections on the beam to calculate our moment(s) so we can then design our beam sufficient to withstand its loading conditions. Yet when it comes to modeling future events based on historical and projected data as an economist, I sometimes back up and take a second look. Oh, we have gone to great lengths to prove the model statistically significant. We have calculated probability upon probability. We have run every F-test there is to run, and then some. We have found the t-value, the p-value, the F-value, and every other value. We have even squared and cubed some of our variables to make beautifully curved polynomials, convex and concave. Heck, on some occasions, like last week, I was forced to solve for exponents as unknowns. We have even solved for four unknowns simultaneously using four equations—by hand. And forbid us to have to take a derivative or some other foreign technique. Yet, in 2006, when I modeled US and world GDP based upon several independent variables and determined that the US and world economies would soon collapse, my initial reaction was to back up and punt. “How could this be? After all, the US economy has stood the test of time. How could it be possible that this much havoc would be reeked upon millions of people, at once? Certainly, my analyses must be in err.”

But my analyses, my model, nor my projections were in err. In fact, a couple years later they would prove to be within 0.3% of actuals; that is point three percent, as three tenths of one percent! So, it is now that we consider the current state of the US construction industry, again. To do so, and without any too-fancy models, we will consider the state of the construction industry and US GDP from an output perspective. As such, let’s look at the construction material and labor cost index (1970-2016) maintained by Turner Construction, as well as US GDP (1970-2016) maintained by the World Bank. In so doing, there are several methods we can use to view these data for rendering any projections, but as promised, we will keep our analyses simple. For our purposes, we will consider the following questions:

1. What should we expect construction costs to be through 2020?

2. Can we use construction costs as a predictor of US GDP?

3. What should we expect US GDP to be through 2020?

Read article… US GDP 2017