Brickonomics

Figuring out trends in housing, construction and property


Rise in self-employment eases as construction employment prospects improve

Brian Green

The latest construction-sector labour market data is encouraging, if you are a worker that is.

The data show the level of employment at the end of last year was at its highest since 2009. Unemployed former construction workers are now as thin on the ground as they were in the best of times before the recession. And wages appear to be steadily improving. The earnings data suggest total average earnings within construction were up 3.6% on a year ago.

As we see there has been an increase in the “army” of construction workers (those employed and those unemployed, see third graph) over the past year or so. But the progress of rebuilding the construction workforce is slow. The 40,000 increase over 2014 probably owed more to renewing contacts and contracts with labour agents in Eastern Europe.

So with labour in short supply and demand rising. Things look bright for construction workers.

Jobs feb 2015No doubt employers hearing this “good news” may see it rather differently. They will see looming skills shortages and rising labour costs. They will see management headaches with increased uncertainty over both the cost and the availability of labour.

Naturally they’ll do what they can to reduce this, but what?

Well they will look to foreign shores and are already doing so.

But perhaps there’s a hint in the data of another strategy.

One of the more notable details of recent construction labour market data is the pick-up in direct employment and the easing in the growth of self-employment.

Now there are lots of possible explanations for this.

The rate of self-employment is driven by many factors: the desire or need of a firm or a worker for flexibility; redundant workers turning to self-employment while looking for full-time direct employment; uncertainty within firms over the skills needed or the work coming through in the medium term; the level of interest shown by HMRC over clamping down on abuse of the lower tax available through self-employment; and other host of other things.

But here’s a thought. Could the rise in direct employment and a slowdown in the rise in self-employment be a sign that firms are looking to reduce uncertainty? Are firms taking more workers on the books with the aim of controlling risk around labour availability and price shocks?

The data are limited and the time series not that long. But I charted the annual increase in total average earnings against the proportion of self-employed in the construction labour force (see bottom graph).

It’s a simple graph that does not account for other influencing factors. But it seems to suggest that on balance as pay rises increase the level of self-employment in construction eases.

So perhaps we should expect to see the balance between the self-employed and directly employed shift in coming months.

Reasons to be cautious over the latest construction output data

Brian Green

Last Friday the Office for National Statistics released final quarter data for construction output in 2014. It put growth for the year at 7.4%.

This, according to the official record, followed slightly anaemic growth in 2013 of 0.4%. The suggestion from these figures is that construction took off rapidly in 2014. 7.4% growth is pretty tasty.

But should we believe this version of recent history?

My advice would be no.

I suspect when the figures are settled later this year we will see a different pattern. Say growth anywhere up to 3% for 2013 and growth between say 4% and 6% for 2014.

This is not just a punt. There are good reasons to suspect this.

I can’t say I fully understand what’s going on, but clues can be found in tables 2a, 2b, 4 and 9a of the associated reference tables for the November and December data.

So, here’s my take.

Table 9a shows the implied output price indicator – a series of coefficients that are there to show the difference between the data unadjusted for inflation and data adjusted for inflation (tables 4 and 2b). This important adjustment means we can assess the industry output both in cash terms and equivalent volume terms.

TheImplied output price indicators graph graph shows the path of the indicator published in the latest release (for December) compared with the path in the release published a month earlier.

We see a strange dislocation in the latest data. Rather than the data suggesting a steady pattern of inflation we have a sudden drop to apparent lower inflation in January 2014. This clearly isn’t how inflation works, unless for instance there’s a sales tax increase or the like. Even then it’s unlikely to be that stark a jump.

Look then at the revisions to table 2b (the non-seasonally adjusted volume measure). Almost £2 billion has been added to the period January to November 2013 in the latest release compared with the previous. The upward revisions to table 4 (the non-seasonally adjusted current-price/cash measure) is just £384 million, if my maths is correct.

What is more significant in this argument is that there have been no upward revisions to the data for 2013 or earlier.

The upshot is that statistical changes to 2014 data have raised the estimated level of work done. But no revisions have been made to 2013.

So, why the revisions?

There are two possible explanations that pop into my mind for a major change in the implied output price indicator. Firstly there has been a change in the estimate of the inflation rate applied to construction output. Second there has been a change in the structure of the data that has shifted the implied inflation.

But why were revisions made to 2014 and not 2013, leaving an uncomfortable jump in the data in January?

The reason here is likely to be that the 2013 data is fixed, because it is tied to the national accounts (The Blue Book, which I understand to be locked until June).

This would mean adjustments can be made to the 2014 data as more and better information is available, but this new information cannot be applied to 2013 until the Blue Book is reopened.

The trouble is we now have an apparent bizarre set of numbers. The suspicion is that the inflation adjustment (real or implied) fixed into the 2013 data is too high.

What does this mean?

If we were to assume the data will eventually run smoothly across the two years (let’s assume the implied inflation comes in closer to the dotted red line in the graph) the effect would be to raise the constant price output figure for 2013. All other things being equal, this would do two things. Growth in 2013 would rise while growth in 2014 would fall.

Ultimately we end up at the same place, it’s just the route is a little smoother.

So why does it matter?

The truth is for most people it isn’t going matter a jot. But for people who analyse how the industry is performing it has profound implications. We rely on history to provide a clue as to what is happening and what we might reasonably expect to happen in the future.

The statistics are vital tools to help plan better and set policy better. Well that’s the theory, one to which I subscribe.

Construction’s daunting challenge: Find one million new recruits in a decade

Brian Green

Construction will see faster employment growth than any other of the six major business sectors, according to projections by UK Commission for Employment and Skills.

Between 2012 and 2022 the average annual rate of expansion in the construction workforce is put at 1.4%. That compares with 0.6% for the economy as a whole (see top graph).

UKCES 1Even when you look at the economy divided more finely into 22 sectors, construction still comes out third, after information technology and electricity and gas.

One startling figure in the wealth of data published in this research is the implied need for construction to find more than one million new recruits in the 10 years from 2012 to 2022. A daunting challenge.

But, for me, the mind-blowing figure in the whole array of data is that, with the steady decline in skilled trades in manufacturing and other sectors expected to continue, more than half of all new skilled trades jobs created in the UK between 2012 and 2022 are projected to be in construction.

That should place construction central in the minds of careers advisers. If a youngster is looking for a solid skilled trade for a career, construction is the first port of call.

The scale of growth presented by the UKCES projections amplifies the message from the recently released by CITB’s Construction Skills Network that the industry needs to recruit heavily.

The assumptions, base years, definitions of construction and the methodologies used will differ between the two studies. But, while UKCES takes the narrow definition of construction, its projections are more dramatic than those of the CITB. The UKCES projection implying a need for an average of 100,000 new faces a year between 2012 and 2022 compares with CITB’s latest forecast of an annual recruitment rate of just shy of 45,000 between 2015 and 2019.

One part of this difference may be explained by the horrendous demographic bubble in the age profile of the current crop of construction workers. There’s a high proportion moving into their 50s which suggests a likely acceleration in retirements over the next 10 years.

Looked at from the point of view of those considering a career in construction, an industry offering jobs for 100,000 new faces over the next decade is fantastic news.

You’d think this would be cause for celebration. And it should be.

Sadly looked at from a wider perspective it just adds more worry to an industry wondering how to cope with expanding demand. A major reason why the projected growth in construction jobs is so high is that so much of the workforce was lost to the recession.

The other issue, put bluntly, is that the cost to train a million new people from scratch would come in not far shy of £30 billion. That’s a £3 billion annual bill before you add in the cost of ongoing training of the existing workforce.

Both sets of projections underline the massive task ahead rebuilding the construction workforce. And there’s little hope of finding slack to call upon from among unemployed former construction workers. Those numbers are back to pre-recession levels.

The latest construction survey by RICS, the surveyors’ body, shows skills shortages at their worst since the boom years before the recession. Furthermore, RICS conducted some research that led to the rather apocalyptic headline “Will 2019 be the year that the UK stops building?” on its website. Apparently the research showed firms turning down work at a disturbing pace through lack of resources.

The truth is, as a nation, we screwed up in the recession, allowing a strategic industry to atrophy and blindfolding ourselves to the obvious need to have the industry at near full throttle when the recession eased. I say “we”, but I really mean the folk that administer this country.

But for all the mess that the industry must manage in the short term, projections suggesting strong job opportunities in the industry should be welcomed. It must be seen as an opportunity, a base on which to rebuild the industry for the future.

The data stem from the UKCES Working Futures programme (see The Future of Work report published in February 2014). Clearly, whether you accept the numbers or not, they make for interesting reading.

The projections suggest the construction industry will employ in 2022 more people than at any time since 1990. But the biggest growth rates will be in management and technical occupations rather than in the more traditional skills.

The implication is that the profile of the construction workforce will steadily become a more white collar industry. The second graph shows the expected shifts in the proportions of occupational types in construction between 1992, when many of today’s main crop of construction folk were building a career, and 2022.

UKCES 3However, the biggest task for the industry in terms of sheer number will be in recruiting and training skilled trades. The UKCES projections suggest it needs to find about 461,000 in the period 2012 to 2022.

There will be on these projections proportionately two thirds more senior managers and professionals, two thirds more in sales and customer services and about 40% more associate professional and technical staff. Administration and elementary skills meanwhile will have shrunk by about 40%, plant operatives will decline by about 20% relatively.

Importantly the projections suggest that the proportion of skilled trades will remain broadly similar. This will remain the core of the industry continuing to represent more than half the industry workforce.

The shift is expected to be mirrored in the educational background of those within the industry. From 14% with education rated above A-level in 1992 the proportion was put at 21% in 2012 and is expected to rise to 30% by 2022. The numbers with higher degrees and doctorates is expected to more than double.

Boiled down, to make this scale of transformation within the industry, the implication is that newcomers to construction are expected to be on average far more highly educated.

Perhaps depressingly, especially given the reshaping in the roles expected within the industry, the UKCES projections don’t see the proportion of females rising in any meaningful way.

UKCES 2However, this is partly because of the proportionate fall in administrative and secretarial jobs. Women’s faces will continue to become more present in more senior roles, although by 2022 the projections suggest they will still be fewer than one in five.

The data also allows us to explore where the rise is likely to happen. Here one needs to be a bit cautious because of the fickle nature of construction demand regionally. The third graph shows how across all regions the expansion of the construction workforce is projected to easily outstrip employment growth within the economy as a whole.

Clearly the challenge to find one million new recruits will be a daunting one across the nation. But the more pressing challenge is for the industry to turn this pressing threat into an opportunity to build a better industry for the future.

Here, I feel, the Government rather owes the construction industry major support if it truly is wedded to having a long-term economic plan.

 

Bright prospects ahead for construction. That’s the forecasters’ view

Brian Green

UK construction by 2018 will have witnessed a five-year growth spurt not seen since the 1980s. That’s what is suggested by the majority verdict among the latest batch of industry forecasts.

Taking Construction Products Association forecast numbers, from 2013 to 2018 the industry output will have expanded by a quarter. Only in the post-War era up to the 1960s and in the late 1980s did construction enjoy growth of that magnitude over a five-year period.

This will, if it happens, put huge stress on the depression-depleted resources of an industry already looking to imports of materials and labour to cope with rising demand. Which is, perhaps ironically, one of the risk to the growth forecast.

This resurgence in construction since the start of 2013 has been down largely to fast expanding housing work, especially new build. In the seven quarters 2013 Q1 to 2014 Q3 new housing output rose by 40%. Much of this will be down to the boost from Help to Buy. There has been a longer term upswing since the darkest days of recession, which has seen the new housing output rise 80% since 2009 Q3.

The majority view among the forecasters is that growth in house building will remain strong this year, but ease in 2016. In terms of the value of output this will see all new house-building work rise above its 2007 peak this year.

Forecasts feb 2015The majority view is that all other sectors will grow over the next two to three years. But there is, among the four forecasts covered here, a dissenter from the full-steam-ahead view of the future. The Hewes forecast, which tends to take on board more of the downside risks, suggests solid growth this year, but a dip into recession in 2016. It expects most new-work sectors to flag.

Hewes takes the view that house building, the big driver of recent growth, will falter in 2016. It expresses concern about a downturn in the cyclical commercial market and does not share the other forecasters’ optimism that the talk of more infrastructure work will convert to a boost to actual construction output.

Its view on direct public sector spending on construction is similarly much bleaker than the other forecasts.

Set against the three other forecasts which appear fairly consistently positive in outlook, the view presented in the Hewes forecast appears very downbeat. But it is worth noting there is considerable divergence in views over each of the construction sectors.

This is perhaps most evident in the infrastructure sector where Experian expects an expansion of more than 40% compared with CPA at 30%, Leading Edge at 15% and a drop of 5% in the Hewes forecast.

Certainly the infrastructure sector is giving forecasters the biggest headache at the moment. There is much talk of work in the pipeline, but the uncertainty over the work is high.

The good news on uncertainty is that the downside risks look less worrying, despite yet another saga of confusion over what will happen in the Eurozone following the Greek elections. But as mentioned earlier, supply constraints may act as a dampener.

Importantly the UK economy does seem to have found a firmer footing since 2012. Then, in the face of flagging growth, the Government appears to have eased on austerity (despite rhetoric to the contrary) and it also pumped money into the system through Funding for Lending. This in turn supported Help to Buy. This boosted mortgage approvals and consequently house building rose to meet the expanded demand.

The overall effect of these policy tweaks seems to have been to turn an extremely dismal economic performance over the previous two years into something more solid.

History and the data suggest it is solid economic growth that pumps life into construction. For my money this does support the view that construction will see growth, unless the economy is hit by a nasty shock.

One other factor that supports economic growth and suggests a bolstered underlying demand for construction is the expansion in the population.

It’s hard to quantify the specific level of demand for construction created by a growing population, but why not let’s try to get a handle on the scale?

Let’s assume each extra person needs the same share of the built environment as those already here. On current figures that comes in at about £80,000.

(The ONS put a replacement value in 2013 on the total stock of UK built environment that is in use at about £5.2 trillion. That’s the gross capital stock figure. The net capital stock, which takes into account that some of it is well worn, came to about £3 trillion. That means there was in 2013 about £47,000 worth of built environment per person, which would cost about £80,000 to replace.)

The population is growing at between 400,000 and 500,000 a year at present, according to ONS estimates.

To meet that increase on our assumptions would take investment of £30 billion to £40 billion. That’s about a quarter to a third of the current investment in the built environment.

Back in the 1990s the population was growing annually by between 130,000 and 210,000. In very round figures this suggests investing between £10 billion and £20 billion a year to provide for population growth.

Boiling it all down the industry needs to be about £20 billion or so bigger than in the 1990s just to accommodate a faster growing population. Add in the backlog of work left as the industry shrank during the recession and there’s a hint at potential demand.

Naturally the relationship between the built environment stock and the population is not linear. On one hand we use buildings more efficiently, reducing the demand. On the other hand we want better buildings and more space so we need to spend proportionately more. In all that there’s the muddle of what buildings and structures we actually need to match the type of society and economy we want and how much we are prepared to invest.

But it’s worth noting the ONS estimate of the replacement value of the built environment has doubled in proportion the population since the 1970s.

The key message from that crude data doodling is there’s potentially very strong underlying demand for more buildings.

Not least among them would be more houses.

The big question, as always, is who will invest and how much to do what?

Déjà vu, predictability and the challenge to fill the construction skills gap

Brian Green

UK construction needs 44,690 new recruits a year for the next four years at least, says CITB following its Construction Skills Network research.

Last year it put the estimated annual recruitment requirement at 36,400. The year before, it estimated 29,050. The pressure seems to be growing.

Set this against the 7,280 apprentices completing in England in 2013 and the picture looks really rather depressing.

It’s hard not to be maddened by the inevitability of this rapidly growing workforce problem. I’ve found plenty of reasons to blog (not least here) on the predictable roadmap to a skills crisis for more than two years.

So what now?

From where the industry stands now there’s little hope of turning out enough suitably qualified construction workers to fill the expected skills gap in the short term. That is without a major plan leading to a scale of state interventions not seen since the early post-War years. I’ll not hold my breath.

The pool of ready-made unemployed construction workers is as small as it was during the boom, so little hope there.

There’s a chance older workers already in employment may hang on a bit longer. They seem to be. But that just buys a bit of time unless the industry finds new ways to employ those who find the physical side getting too much.

There’s hope that, with a more attractive outlook, former construction workers who found work elsewhere might be tempted back into the industry. And there may be some with similar skills in industries in decline that fancy moving into construction.

The attraction would become more significant if pay in construction rises rapidly as a result of the shortages. Tempting such people will help. It must be tried. But I doubt it’s a complete solution.

The industry could look to reducing its labour input. That pretty much means prefabrication to the lay person or modern methods of construction (MMC) as it’s described within business. You’d expect labour productivity to go up, as well as overtime. But major changes tend to happen gradually in construction.

So what’s left? Well the labour agents of Poland, Portugal, Latvia, Lithuania and Hungary, among others, will be once again licking their lips in anticipation of a bonanza.

OK, the irony doesn’t escape me either that prominent among the tattoos on the skin of this Government were “economic competence” and “get tough with immigration”.

But what do we have?

Such a massive hole in the construction workforce would have been avoided had more direct public investment in house building, schools and other essential infrastructure been forthcoming. I’ll not rerun the case for weighting public capital investment towards downturns, but simply say these things we desperately need for our future prosperity could have been bought more cost effectively by the nation when the private sector was in decline and Government borrowing rates were negligible, if not negative.

So what realistic short-term option will construction firms find to fill the hole in their labour force?

More migrant construction workers.

Surely this is not a situation this Government would have willingly chosen. But it is the predictable result of its choices.

Now I know it’s a cliché, but where’s the long-term joined-up thinking?

It’s desperately needed as the construction industry, no doubt with a sense of deja vu, navigates its way once again up the slope from a deep recession.

Perhaps of more immediate importance is the need to avoid silly short-term knee-jerk policies.

Am I asking too much?

Immigration tops the nation’s concerns according to Ipsos Mori’s “The Most Important Issues Facing Britain Today” poll in December.

Will vote chasing politicians in vote chasing season steer us towards tighter immigration controls?

If they do that really would leave the construction industry facing serious problems, both in the short and the long term.

What do we need more: people to build buildings or people to deal in them?

Brian Green

Here’s a question posed by the labour market figures: Why since the recession hit do we have more dealers in buildings and fewer people building them?

From the heady pre-recession days there seems to have been a 17% expansion in employment among dealers in buildings while employment among builders of buildings has shrunk 20%?

That seems to be what the employment data tables in the ONS labour market data release tell us.

Despite talk of a strong revival in construction, the 5% growth in real estate jobs over the year to last September overshadows the 2.5% growth in construction jobs.

To horny-handed sons of toil in construction all this will seem like a very strange way to rebalance the economy. It will seem a bizarre way to solve the housing crisis. It will seem fantastically inefficient. Indeed from all angles it will seem plain wrong and in need of some convincing explanation.

In fairness you can shrink the apparent problem by choosing different statistics. No this is not about lies damn lies and statistics. It’s just measuring a squidgy moving target is a lot more complicated than some people think.

The figures don’t look so bad if you examine the ONS preferred measure of short-term employment trends, the workforce jobs data. They show a drop of 11% for construction and a rise of 9% for real estate activities.

For my money the workforce jobs data may be better for most industries, but the fragmented itinerant nature of construction and its high level of self-employment present real problems in collecting and scaling the survey data. So the reality may be much worse than these data suggest and far closer to the bleaker picture painted by the employment data provided by the Labour Force Survey. But that’s a guess.

One advantage of the workforce jobs numbers is that they can also be broken regionally.

Estate agentsLooking at the data that way does however torpedo any hope of finding an explanation in a quirk in regional distribution. It’s not just a London and South East thing. In all regions bar Yorkshire and Humberside real estate jobs are in greater numbers than at the pre-recession peak.

(That said the data does reveal one very peculiar oddity. The biggest percentage growth in real estate jobs, by some margin, is in Wales. Don’t ask me to explain that one.)

As for construction jobs, there are far fewer in all regions bar London and the South West. Think wealth and the migration of wealth and you might find and explanation for that pattern.

There is of course another obvious suspect when we scour for an explanation for the phenomenal rise in estate agents – the rise of buy to let and private renting.

If you care to look at the numbers, cast them how you will, but the rise and fall in buy-to-let mortgages corresponds very neatly with the growth rate of real estate jobs.

That’s alright then, problem solved, we can explain why there are more estate agents jobs.

Well hang on. That’s not the real question.

The real question is whether it is more efficient to employ people in what is mainly transactional affairs rather than in productive affairs.

That I will leave to some clever politician or economist who can explain to me, and I suspect a rather perplexed construction industry, why in the face of a shortage it is imperative we increase the numbers of people allocating resources rather than the numbers creating them.

A £20 billion repair bill to fix the UK construction industry after the recession

Brian Green

Just what has been the cost to construction of the recession? Could and should policymakers have made the slump in activity less painful? Were there better policy options?

These questions need desperate attention. Mistakes were made. Bad and avoidable mistakes, in my view. Lessons must be learned.

Construction is a strategic industry. Having a construction industry is not an option for any nation. That makes it special, like health, education or defence.

Recessions can disproportionately hit construction. The damage, however, will eventually need repairing and that comes at a higher or lower future cost depending on policy decisions made when the recession bites.

In any sensible world, policymakers would estimate that cost and factor it in before deciding whether to cut or boost public investment and whether to incentivise or not private investment. They should be aware of the cost of recovery when assessing the value of investing in the fruits of construction.

From what I have observed over the past six years, I doubt that crosses their minds for more than a fleeting moment.

So let’s see if we can start exploring what damage was done and put a figure on the cost to put things right, even if we start from back-of-an-envelope sums.

The severity of the damage caused to construction by the Great Recession is patent. Two impacts on the UK industry are hard to ignore. They are currently a source of grave anxiety for businesses and policymakers. The loss of skills, or human capital as economists might describe it, has been huge. The depletion of physical capital and capacity within the whole supply chain is significant.

There has been, however, massive but less immediately evident damage caused by half a decade in an economic quagmire. The construction industry’s reputation, never that splendid, as a career choice for young folk has once again been tarnished. And a particularly worrying concern must be the potential damage to UK contractors, particularly large firms, caused by six years of less-than-prudent bidding.

It was all rather predictable, but the fallout from imprudent and suicidal bidding is yet to be realised and is very unpredictable. Many contract periods are long, so the final bills are yet to be settled. And the final settlement on a contract is far less straightforward than many might suppose. While the effects are being seen in the accounts of contractors, it will be sometime yet before we can measure the full damage.

As Warren Buffett would say: “Only when the tide goes out do you discover who’s been swimming naked.”

The cost to repair the damage to corporate structures is hard to assess. There will be loss of goodwill, expensive restructuring and thousands upon thousands of hours spent sorting out the mess. Organisation knowledge will be lost as yet more human capital is thrown to the wind. On the upside, change might force some improvements.

In finding a figure for the cost, it might be worth starting by examining human capital. The concept may seem a bit wishy-washy, so it might be instructive to see the estimates by the Office for National Statistics. ONS estimates the loss of human capital between 2008 and 2012 was £1.1 trillion. Falling from £18.2 trillion to £17.1 trillion

Just playing with the figures and assuming human capital were spread evenly among the nation’s workforce, which it isn’t, the value of the human capital in construction in 2007 would be about £1.18 and in 2012 about £0.93 trillion. That would be a loss of £250 billion.

The scale is mind-boggling. Now while this huge figure may be within an order of magnitude of the loss of human capital to construction, it’s clearly miles away from the replacement cost. Most human capital is accumulated out of the workplace and work-related training, but much is associated with working.

A more pertinent question might be how much would it take to train a replacement for each worker lost to the industry? We should be able to come up with some reasonable guesstimate figure for this.

I was given for a blog some years ago a rough-and-ready figure of £30,000 for the total cost to train person and provide on-the-job experience from scratch to become skilled in construction. It must be remembered that formal training is just part of the cost. Skills are acquired over time when productivity is lower than it might otherwise be and supervision higher, representing a cost to the firm.

This figure can only ever be crude given the range of skill levels and ages within the industry. It is probably light when all costs are taken into account and the cost to train senior people will be much higher, but let’s work with it.

The costs associated with raising human capital are generally absorbed in the normal scope of business, they may attract grants, but the process is in normal times generally a continuous one.

However the industry lost about 400,000 people to the recession. Much human capital was lost for good, much was not replenished as it would have been, which means the industry would have made savings through the recession on training costs.

But now for the flip side. Filling the gap that is left, if it is to be done without a huge influx of foreign workers or be overcome through innovative building techniques, will now mean an expansion of training, formal and on-the-job. This will cost the industry, based on our estimated average figure, £12 billion. No wonder “importing” skilled workers from Lithuania, Latvia and Poland looks attractive.

We can do similar figures for physical capital. Let’s look simply at some figures for net capital investment for the construction materials suppliers from the Annual Business Survey (many thanks here to Dr Noble Francis and his team at the Construction Products Association for the base data).

Ignoring 2008 as it represents a transition into recession, the estimated average net capital investment in the years 1997 to 2007 was £1.41 billion. The figure 2009 to 2012 was £750 million. That means there was an average annual drop of about £660 million. The 2013 provisional ABS figures don’t suggest a major recovery in investment.

A rough count would suggest that over the five years 2009 to 2013 inclusive, the total net capital investment was £3.3 billion less than it might otherwise have been. An investment more or less of this scale will be needed to bring things back to where they were in the material supply sector before the Great Recession.

We then need to consider the collapse in capital investment by contractors, by plant hire firms and by the distributors. The damage to the industry’s infrastructure here will also have to be rebuilt if construction firms are to deliver as effectively today what they could in 2007.

It would not take much consideration of these and other factors before we might reasonably estimate the degradation of the industry from recession will cost at least £20 billion to repair. That’s about £300 per person in Britain and this leaves aside the damage caused to the image and reputation of the industry.

To put that £20 billion in the context of the industry itself, it is about 10 times the total pre-tax profits made by the top 100 contractors in 2007.

Now you can quite rightly argue with these figures. You may feel they wildly underestimate or wildly overestimate the challenge. But it’s hard to dispute that the recession has left the nation with a huge bill to pay if it the construction industry it desperately needs is to be restored to what it was before the Great Recession.

Now ask yourself, was it such a good thing for the government not to invest more heavily in construction when the recession hit?

As I hope to explore in future blogs, there were clear alternatives, what’s more they could have made and saved the government money and, ultimately, reduced the nation’s debt.

Forecasts paint a brighter future for building, but infrastructure data clouds the picture

Brian Green

The latest batch of construction industry forecasts out this week paint a brighter picture of growth for building in Britain, but a confused picture for prospects in the infrastructure sector.

I’ll turn to the confusion later, but for now it’s safe to say that, taken as a whole, the forecasts reflect and seem to support the general improvement in confidence within construction.

Despite recurring concerns over persisting fragility within the global economy, Europe in particular, the Construction Products Association (CPA) suggest a strong bounce back over the next five years.

Forecast autumn 2014 aIt expects growth rates ranging from 3.3% and 5.3% for each of the next five years. This should swell construction by 23% in real terms from 2013 to 2018.

As the graph shows, Experian is equally as bullish over the next three years. Hewes provides the usual useful counterpoint, as this forecast tends to factor in more downside risk, so is inevitably much less optimistic.

All three are extremely bullish about housing in the near term and, while Hewes sees growth fading, the CPA takes the view that growth will continue through to 2018.

Experian and CPA also expect strong growth from the commercial sector, with growth of around 15% over the three years 2013 to 2016. Hewes takes a far more pessimistic view.

Overall new work is expected to be a bigger driver of construction growth than repair and maintenance over the next few years. This is consistent with strengthening growth in the economy and growing confidence among investors.

But the forecasters do see respectable increases ahead in repair and maintenance work.

Pulling all this together the forecasters all upped their expectations for building.

There is however one big twist in the tale of these forecasts this time around, the variation in expectations for new infrastructure work. Rather perplexing official data has led to big disparities in the forecasts for the sector.

Experian and Hewes show new infrastructure work falling this year. The CPA penned in growth of almost 9%.

What is extremely interesting and pretty unusual is that CPA appears to have stepped away from using the ONS construction output figures as its datum for new infrastructure work.

The forecasts says: “Recent statistics from the ONS report that Q2 infrastructure output was 8.2% lower than one year ago and new orders were 32.0% lower than a year ago. These declines contradict surveys within the sector that suggest increasing activity. As a result, the infrastructure forecasts are not purely based upon recent output but also take account of survey and pipeline evidence.”

The suggestion here is that the CPA suspects there may be a problem with the Office for National Statistics (ONS) construction output new work infrastructure series. And, indeed, the performance of the series has raised a few questions of late.

But the CPA decision to forecast away from the data currently presented in the ONS infrastructure series raises some intriguing issues.

Unless the figures are revised upward, for the official output figures to hit the CPA forecast for this sector, on my calculations new work infrastructure output in the final four months of this year would have to be 40% up on the final four months of last year.

That would be a phenomenal and, I sense, an unlikely turnaround in work on the ground.

Then again, a problem may be found in the data and the CPA view could end up matching the official figures through revisions to the back series.

But ultimately whether the CPA forecast and the ONS figures end up matching is just part of this puzzle.

What is perhaps of greater concern is whether there is actually a problem with the infrastructure figures or not. This is a moot point. It reveals just how hard it is to forecast change in construction industry activity and just how hard it is to know with certainty the level of work within the various parts of the industry.

Certainly civil engineering contractors have seen strong growth for a year or so. And there has been much rhetoric and bullish talk about investment in infrastructure. This all points to the data being misleading.

On the other hand we must consider what is actually happening within the industry. Inevitably some of the buoyancy civils firms feel is down to the rising tide of new building work and the ground works and services associated. Could it be this that is boosting civils work and disguising weaker infrastructure work?

Certainly, we have a problem in understanding how much infrastructure spending actually goes on construction work – that is how much goes to contractors suitably coded as being in construction and how much to other firms not classified as construction, such as process engineering firms.

A road job has a large construction element, a windfarm far less. The construction content of water projects will vary depending on the proportion spent on mechanical systems and controls.

There are of course other potential sources of confusion within the data classification and within the collection process.

Are we missing some specially-formed joint venture businesses in the sampling, or underplaying their importance?

Are firms not classified as construction undertaking what is construction work and so work is being wrongly allocated to, say, manufacturing?

Are firms correctly allocating construction works within the forms they fill in for the ONS?

There are a host of possible effects that can distort a data time series.Forecast autumn 2014 bCertainly a variation in the mix of work will have an impact.

So let’s out of curiosity compare the proportion of each subsector within new work infrastructure in the four quarters to Q2 2007 with the four quarters to Q2 2014.

We see there has been a profound shift in the mix of work. Road, water, sewerage and harbour works have declined, while rail and electricity work has increased.

Could it be that a big headline investment in electricity gives the impression of lots of work, but in reality only a low proportion of that work is recorded as construction?

These are questions that need research before we know if a problem with the ONS data is likely or not.

Ultimately without deeper knowledge it is extremely hard to know for sure if the ONS infrastructure time series is a reasonable or unreasonable reflection of the path of construction’s share of the investment in infrastructure.

It is certainly a conundrum and once again illustrates the extreme difficult in measuring each month how big the construction industry really is.

 

Note: the bottom graph has been replaced since first posting as it originally had 2017 not 2007 in the title.

Questioning data, questioning the value of data, glasshouses and stones

Brian Green

Last week’s ONS construction data release caused a few ripples when it showed output dipping in August.

It also sparked some sharp criticism from Chris Williamson, chief economist at Markit – the people that bring you the PMI surveys.

The second paragraph of his commentary reads: “We question the value of the official construction data due to the scale of revisions that occur after data are first release. The signals about the health of the sector and the economy as a whole can be utterly misleading as a result.”

I’m no shrinking violet when it comes to criticising statistics. But I wondered whether the comment was fair, balance or constructive. So is it?

The ONS release suggested a drop in output of 3.9% in August compared with July and a drop of 0.3% comparing August 2014 with August 2013.

It also showed a 5.5% dip in private housing between July and August, which surprised a few people.

Output Oct 2014 1For me there was no great surprise in the figures. Mind you, I wouldn’t have been shocked if the monthly figure went up. It’s an early estimate of one month’s data on the level of construction in various sectors. It is not a snapshot indicator of sentiment.

August was a bit wetter than usual, so it may have dampened output. The industry is in a state of change so volatility is expected. This is particularly true of house builders as they restock their production pipelines. Even when the construction industry is on a reasonably even keel the data are volatile.

Looking at average of output over three months probably gives a better picture. The three months to August showed growth of 1% on the previous three months 5.3% on a year ago. So the data clearly suggest underlying growth, with a possible hint at a easing in the growth rate of late. That is all clear from the top graph, which illustrates the volatility of monthly data.

Should you always expect to be going upward when you’re climbing a mountain? I don’t, not that I climb that many mountains.

What’s more would I, if I were running a construction-related business, be reliant on updates on the level of production at a GB aggregate level to a high degree of accuracy on a monthly basis? Well probably not. A general sense of where things are going at an aggregate level from a few sources will do fine, even if they are contradictory, along with a damn good detailed understanding of my particular markets. So what’s the problem?

What about the issue of revisions? They were pretty big this time around.

Revisions are a pain. But then again not revising the past when you learn that you misrepresented it (absolutely or relatively) presents its own issues, particularly if your information customer is me – someone who likes long data series with as much consistency as you can muster.

The scale of revisions we are told was partly down to a number of technical things, such as re-referencing the indices to 2011=100 to align with the National Accounts outputs and seasonal adjustment methods in the new processing system, plus the usual adjustments made to incorporate late data.

If you imagine all the elements that feed into or are related to the National Accounts as a huge multidimensional jigsaw that has to be, as far as possible, internally consistent, revisions are inevitable. When one bit moves others have to move.

Annoying as they are, I’ve learned to accept the regular revisions. Oddly, the upside is that in some odd way they seem to give me a better understanding of the strengths and weaknesses of the series.

To my mind, ultimately, all construction data are iffy. It’s just a question of how iffy and why.

Construction is a highly complicated industry to capture with simple measures. The projects are lumpy and extremely heterogeneous. The sectors are variable and hazy. The firms are all different shapes, sizes with very variable mixes of work.

Finding a neat way to capture all that in a few simple indicators presents the surveyor and statistician with a nasty task. Trying to get an accurate gauge on the precise level at any one time is even more devilish.

That’s what the ONS seeks to do with the construction output figures. For me, at least, it is less a short-term measure of direction of change than a useful gauge of level over time.

My approach on short-term trends tends to be to use what might be described as triangulation. I look at many surveys (including the ONS construction output and orders), assess as best I can how they match and how they conflict. I question their individual weaknesses and I try to assess how they fit with the broader context.

The Guardian used to run ads suggesting that it, as a newspaper, looked beyond the meaning one might ascribe to one observation and took in the bigger picture before seeking to interpret what was actually happening.

The first clip might show a dodgy looking fellow pushing an old lady. Your immediate thought was “mugger”. The second clip (the reveal) would then show the “thug” bravely pushing the vulnerable lady away from falling bricks. Ah, not a thug, but a hero.

Context is all, beware cognitive bias, etc, etc.

As with people’s intentions, we can read data and get the meaning completely upside down.

A lesson I learned long ago was to question all data. When seeking meaning from data it’s worth bearing in mind among other things, how they were collected, the assumptions in the methodology, the survey size, the motives of the respondents, how the survey data is translated into an estimate of volume or change, the impact and treatment of occasional factors, weights and price or seasonal adjustments.

You then have to look out of the window, away from the spreadsheet at the real world.

With these thoughts in mind let’s question the construction survey produced by Mr Williamson’s firm, Markit.

To provide comparison and a bit of context I have compared the Markit/CIPS construction survey headline indicator with the monthly construction survey provided by the Bank of England Agents.

Output Oct 2014 2What we notice is that since March 2010 the construction industry has grown on the Markit measure in 47 out of 55 months. However, when there has been a slowdown recorded it has been relatively slight. The Bank of England Agents however did not measure growth until November 2010. They then recorded a slump from October 2011 through to June 2013 (21 months).

If we take the period March 2010 to March 2013 the average Markit/CIPS score is 52.6 (suggestive of sound growth) against the average for the Bank of England Agents of -0.6 (suggestive of modest decline).

I will leave those in the industry to decide which they feel provides the more representative depiction of their interpretation of the path of GB construction.

I will however draw from an unrelated dataset, employment. Between March 2010 and March 2013 100,000 jobs were lost to the industry, that’s almost 5%. Now that could happen with an expanding industry. But it would be unusual for construction, particularly as the more labour-intensive repair and maintenance work seems to have been stronger than the less labour-intensive new-build work over the period.

I’ll not go into the potential methodological issues with Markit’s measure in any detail. I can’t. I’ve asked in the past for a full rundown of the methodology. I don’t recall receiving it.

I have a couple of outside observations though, I’d need to be convinced that procurement directors are necessarily the best placed to gauge business activity within construction (some may well be) and I would instinctively be wary over the PMI sample size given the heterogeneity and the muddled regional spread of construction firms.

Interestingly, I have found the ONS transparent and open to and accepting of criticism over its construction data. The statisticians and their approaches come in for regular scrutiny at the Consultative Committee on Construction Industry Statistics, not least from me. I can see it hurts them at a personal level. But that is the price we pay when we accept our mistakes as we try to get things right.

That brings me to glasshouses. Ideally they are great for transparency. Not so good a place in which to throw stones.

Construction jobs growth appears solid but not spectacular

Brian Green

The number of people employed in construction is up 3.3% on a year ago, according to the latest ONS Labour Market data.

This finding underlines official data showing a steady rise of the industry from recession. Output in the second quarter was up 4.5% up on a year ago.

Employment and output Aug 2014The growth in workloads is solid, but by no means a boom-time level, and like output the rise in employment stalled in the second quarter.

There are of course always reasons to question the data. One question I might ask is whether there has been a sharp increase in overseas labour coming into construction. This would most likely have been missed in the surveying.

We also have to wonder whether employment levels would have been higher if there had been a larger pool of unemployed and trained workers to call on. Unemployment has fallen sharply for those seeking work in

Employment selfemp and ue Aug 2014These are things we can’t know from a quick scan of the Labour Market data. Taking the data at face value and in a wider context, however, we see a picture of a continued improvement.

But we also see the emphasis on job creation firmly centred on the self-employed. In the second quarter level of self-employment was 6.7% up on a year ago, while the level of direct employment was up just 1%.

The industry has lost about 350,000 employees on this measure since the peak in 2008. In aggregate numbers this loss has been within those employed directly. The level of self-employment recorded over the past year suggesting it is at or above the former peak.

Construction army Aug 2014Looking to the future the concern has to be where to find new blood to fill the jobs being created. Unemployment has dropped to levels consistent with a tight jobs market. The growth in the number of employed and unemployed construction workers is slow, as we can see from the bottom graph.

There is no great “reserve army” in the UK of skills waiting to take the jobs increasingly on offer from the industry. Meanwhile the age profile of those within construction has risen, suggesting a faster rate of retirement in the future.

Within this context we can expect to see a rapid rise in foreign labour and we should not be surprised by rising costs.

 
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