Brickonomics

Figuring out trends in housing, construction and property


How do you solve a problem like the ONS construction statistics?

Brian Green

You don’t need a map, satnav or signposts to drive a car from one place you know to another you don’t. But it helps. A guide is handy. It supports better choices. It saves time.

So, too, can good industry statistics. You don’t need them. But a good set of numbers can help to scale your market and provide hints at where it’s heading. Even fairly ropey stats and indicators help.

This brings me to the latest ONS release of the construction output data. These are bedrock figures for scaling the size of the industry. No other short-term indicator seeks to value the actual amount of construction work done each month in Britain.

But there are problems that need fixing and I believe the industry and its representatives should rally to press for a lasting solution to a number of problems that beset the series, those that are known and those that are latent.

These data are hugely important. Sadly their importance is greatly undervalued. Furthermore they have received growing criticism in recent years as a result of major revisions and findings that were seen as at odds with other industry indicators. They have lost the status of national statistics.

For example, a blunt reading of the latest data would say that in April the ONS decided that on an annualised constant price basis the industry was £3.7 billion bigger than it was thought a month earlier. Blimey.

In some ways this actually relieved pressure on the ONS, because the result brought the data more in line with what the industry and analysts expected, whatever the true figure might be. But this is not the first big revision. The construction output series is seen as troubled.

Revisions to construction output that in one go shift annual GDP estimates will raise eyebrows and potentially annoyance, not least when the bragging rights among some economists seem to rest on the slightest tweak in the economic numbers.

Inevitably this all undermines trust and value in the eyes of users and potential users. Sure, no statistical series is perfect and some of the criticisms of construction output data have been petty. But the scale of revisions, including the most recent, have been large. So concern is justified.

But ill-informed criticism based simply on the facts above would be inappropriate, misguided and dangerous. Many of the revisions have resulted from improvements to what is still a young data series that is bedding in.

Wagging fingers of blame and simply casting ONS and its construction data team as the villains here would be unhelpful, with unintended consequences potentially leading to a worse long-term outcome.

The industry should instead press for investment in the data series – a short-term boost to fund a deep analysis of its frailties and find long-term solutions. This I suspect would payback handsomely long term in better data and a better understanding of how to measure construction within the UK.

The alternative could easily be problems emerging periodically with quick fixes applied. That would steadily devalue the data and drain confidence. This could well lead to a retreat in its use and a consequent retreat in the coverage ONS offers in response, leaving the industry to rely increasingly on the partial light cast by trade indicators, useful though they are. Meanwhile, forecasts would have unsteady foundations on which to build a realistic view of future prospects. Our understanding of the industry would be diluted.

It’s worth reflecting on the challenge for ONS. It is relatively easy to set up a trade indicator to provide a reasonable gauge of sentiment and movement in the level of activity in a selected part of construction. I could, so it must be easy.

I couldn’t measure the size of construction output on a monthly basis. It’s a whole different order of task. Construction is an extraordinarily muddled mix of businesses, business interactions, outputs, odd seasonal effects and timeframes. Add to this the potential confusion of how land plays in the mix. It’s highly volatile and the muddled mix is in constant flux, morphing in odd ways. What’s more, simply defining construction is a task in itself.

So hats off to anyone who can measure on a monthly basis exactly how big this industry is.

This was the task ONS took on a few years ago and subsequently produced a new output series starting in 2010, which links to the previous series.

When the ONS took on the role I suspect the complexity of the challenge was underestimated, as would be the case with most people unaware of the idiosyncrasies of the construction industry. It has hit problems on the way and has had to deal with them.

The current set of revisions, which I stress are interim, relate to the output price indices. These provide the deflators used to adjust for inflation so the volume of work over time can be gauged.

Briefly, these inflation rates naturally vary between the various sectors and vary regionally. The previous approach to this has become increasingly unreliable over time. So the ONS needed a new approach. (You should read the background to all this on the ONS website.)

It has put together a temporary fix. This is far from perfect, as ONS recognises.

Those who have read the detail may have spotted that they are based on inflation rates in labour, materials and plant. But what of margins?

The reality is that changes in margins within such a muddled industry as construction are hard to measure. But you might fairly assume they shrink (even go negative) during a recession and expand when things pick up. Yes, the construction industry really does pay its clients for the privilege of working for them during a recession.

So there’s a fair chance that margins are expanding. If they are expanding faster than the other elements (labour, materials, plant) then the deflator will understate inflation in the system. This will lead to an inflated figure for construction activity in constant prices.

So basically the temporary fix has flaws.

The problem is not made easier by the lack of clarity over how the value of the margin appears within the various payments made throughout the life of a long contract and more importantly how this is express within the forms contractors fill in and send to ONS.

Is the overall margin proportionately allocated for each month? If not then how? Also, how do the amounts submitted by contractors monthly account for large and uncertain final settlements left to the end of a project?

Even if there is a neat way to solve this problem (if it is a problem), or to accommodate it, there are a host of other known unknowns. And probably plenty of unknown unknowns.

Consider seasonal adjustment. We pretty much know it is unbalanced across the year, seemingly leading to overstatement in the summer adjusted figures and understatement in the winter. Adjust for this and the growth rate in the latest two quarters may well be higher. But what procedures can you use to improve the seasonal adjustment which are statistically robust and within the protocols that determine good practice?

Furthermore we really don’t know on a month-by-month basis what is actually measured. What I mean is that some firms put in figures for work done that is chargeable, others state the sum invoiced, others point to orders received and some put in data for turnover or income paid in the month. What’s more this leads to a lag between when the work was done and when the work was reported.

This blend of different things measured with different lags will vary month to month.

And, then, we have the problem of what is actually being measured and what comes into the definition of construction. Not all construction is recorded. Construction done by firms that are not construction firms, retailers, manufacturers, charities, non-construction engineering firms would not be measured.

So, in theory, if a non-construction organisation takes construction work in house it disappears from measured construction output, popping up elsewhere in the national accounts.

These are just a few of the major challenges that need to be tackled. They alone represent a major investment in time.

So I think the industry needs to decide how much it values the construction data.

Personally I suspect it needs the data more than it recognises. In that case the industry should refrain from pointing the finger of blame and instead lobby hard for a root-and-branch review of the construction output data. This would require a well-resourced deep examination from the perspective of statistical measurement.

Among its tasks would be to review such basic things as exactly what the construction industry is, how factor inputs vary, how it does business and how this is changing, what administrative and other data it collects and in what form, how efficiently and effectively suitable data might be collected, what factors influence these data and how. The list could go on.

The key would be to build knowledge that would lead to a greater understanding of the industry and a more robust way of measuring it. From this should flow a long-term solutions.

The alternative is carping and criticising. But to what end?

Just how fast is the construction industry growing?

Brian Green

This is a question that’s puzzling plenty of experts in the field at the moment.

The trade surveys suggest strong and continued growth. The official data suggests a slowdown recently. So let’s look at the muddle of data.

The Construction Products Association earlier this week released the latest Construction Trade Survey, which pulls together a range of survey data from material suppliers, contractors, subcontractors and small builders. Its headline said activity had increased for eight straight quarters. Most of the charts it uses point to growth, with the odd exception such as contractors’ public housing orders.

The latest monthly Markit-CIPS survey showed growth, but a slowdown in growth. The meaning is hard to ascertain as the survey has a habit of being a bit over optimistic. But a reasonable take is that it suggests we’ve hit a slight soggy patch in a generally upward path.

One indicator that probably gets less attention than it deserves is the Bank of England Agents’ Scores. These suggest that, as of March, the level of construction activity was up reasonably on a year earlier, but that growth was slower than in last autumn, suggesting a similar pattern to the Markit-CIPS survey.

The first quarter 2015 construction survey from RICS, the surveyors’ body, also suggested a slight slowdown in the rate of growth after a peak last autumn. But the rate of growth suggested by its survey remains historically high. We see a similar pattern with the survey from RIBA, the architects’ body, with the exception that its monthly measure recorded a sharp rise in March.

In terms of construction as a whole, the RICS and RIBA samples are skewed to professionals working in consultancy. Therefore this is more representative of work ahead of that which happens on the ground. So you’d be ill advised to think these data track directly with construction output. The surveys are, however, very useful in the mix. The latest ones suggest future growth and confidence among construction clients, particularly for larger new-build work.

Then there’s the official measure of construction output from ONS. This has been causing a bit of consternation as it seems to be suggesting that the industry has dipped into a technical recession. We’ll see on Friday, but early estimates for the GDP figures suggest construction output in the UK was down 2.2% quarter-on-quarter at the end of 2014 and a further 1.6% down at the start of 2015.

This leaves output in 2015 Q1 almost 1% down on output in 2014 Q1. Hence the consternation.

Now there are some issues with the data. The ONS is working on improving the deflators (the adjustments for inflation) where there are tricky problems. But working out how they might impact on the adjusted output is far from straightforward. There are problems with lags in the data. This means that what we see in the March figures may well be influenced by elements of December, January and February activity depending on how firms fill out their returns.

If you look, you’ll see that the seasonal adjustments appear to be a bit out. This is a new series (starting in 2010) and it takes time to bed down. We know this. You can’t get around it. But observation suggests the data for the summer months are a bit up and the winter a bit down on what you might expect. Crudely readjusting for this (I’m not suggesting you do, other than mentally) might roughly halve the drop we see in the latest two quarterly figures.

So a more accurate reading of the output survey data might be that the industry has been pretty flat over the past year or so.

One point I have mentioned before is that the ONS data measure work from the construction sector as it is defined. There’s plenty of construction work undertaken outside of the sector, such as in-house work by companies and other organisations. So, if over the past year, say, housing associations decided to build for themselves and not engage contractors, the ONS data ought to show a decline even if the same amount of construction work overall was being done.

I use the example of housing associations because there has been talk of such a switch being made. There is no hard evidence that I am aware of to suggest how big a shift this might be, if at all. But these are major clients of repair and maintenance work, so taking this work in house would reduce measured construction output.

Organisations taking work in house would not however alter GDP overall, as the work would be picked up elsewhere in other sectors.

All of the above is either public knowledge or you can work it out from looking closely at the figures. And ONS is addressing those issues it can.

Jobs graphs 14 05 15In mid-week we received the construction employment figures for the first quarter. These add yet another set of indicators to the pile. And opposite I have cast some graphs from the data.

What’s worth noting (not charted opposite) is that the message from these data is that the number of people working in construction is growing slower than across the economy as a whole.

Despite the talk within the industry of rapidly rising workloads, the number of people estimated to be working in construction in the first quarter of this year was just 1.5% up on a year ago. That compares with employment growth across the total economy of 1.9%

What’s more the average number of hours work in a week was lower at the start of this year than last. The data suggest the total number of hours worked was just 0.5% up over the year.

The data shouldn’t be seen as being totally accurate. There are plenty of vagaries. But the clear message seems to be that the total hours worked in construction in the first quarter of 2015 were much the same as for the first quarter of 2014.

Taken at face value you might read that as very slow growth in construction. That would support a position slightly closer to the ONS output position than the trade surveys.

But that would forget a few shifts that are happening within the mix of work. Notably we are seeing a shift from repair and maintenance work to new work, which is less labour intensive. So, you’d expect then that for a given amount of output you’d need fewer people.

Also there has been a drop recently in the number of women working in construction. I’d be cautious about reading too much into this. There are many ways to read this data.

One obvious take on this dispiriting asymmetric movement in the employment in construction between men and women would be that firms are cutting back on administrative roles, where women are more commonly employed. The flip side of this is that jobs on site may well have risen faster than the aggregate figures suggest.

A further queering factor we should be aware of is the influence of migrant workers. A surge in overseas workers into construction would be slow to show in the figures. There has been a tendency for the survey data to under count new migrants in the workforce. So the picture we are seeing may be behind the real curve.

Taking all the above into account it may be that there are more people employed on the ground in construction and more productively (in a very crude sense of the notion) than the figures suggest.

But however you cut it the jobs figures don’t immediately support the idea of a rapid rise in construction. Though you’d expect them to lag rather than lead the trend in activity. They also don’t support a fall.

But one thing the figures do suggest is that there is tightness in the labour market and firms are responding.

Firstly, the number of unemployed former construction workers is at a historic low. Over the past 20 years there has been just one other quarter when the figures suggest unemployment was lower than the current 80,000 count. Secondly, we are seeing a shift back from self-employment to direct-employment.

Self-employment is down on a year ago. Direct-employment has risen moderately strongly. The bottom graph suggests that this could be both a response to fears over shortages and a response to rising wages associated with the boot now being more firmly on the foot of the worker rather than the employer.

So adding up all the above, just how fast is construction activity growing?

For my money I’d be cautious about being too precise. There will have been a surge in work associated with restocking. This kicked off when the Government chose to boost the economy as it flagged in 2012, through such moves as Funding for Lending and Help to Buy.

The increase in stocks is noticeable particularly in the accounts of house builders, where there is a higher level of work in progress. As that restocking surge, which seems to have kicked off late 2012 early 2013, weakens we should expect a slowdown in growth.

This does not mean that the industry is slowing in a general sense. Things are broadly on the up. But there is one big problem, the supply side and in particular skills.

We spent five or six years, needlessly in my view, depleting the supply side of the industry.

We will pay a high price for that. And for me at least it rather taints the pleasure of seeing more cash finally being invested in the built environment.

 

PS: I forgot to add in the BIS building materials data which shows, among other things, brick and block deliveries and production. Worth noting the easing in brick deliveries over recent months.

 

Examining the puzzles and concerns over the latest construction output figures

Brian Green

The Office for National Statistics output figures released on Friday strongly suggest construction is heading for a technical recession. Put another way, recorded output will need major revisions or an exceptional boost in March if we are not to see two successive quarters of decline.

The data suggest output in both January and February, when adjusted for inflation and seasonal factors, was lower than for any month since December 2013. On its current trajectory we are looking at a recorded fall in output of about 3% in the first quarter to add to a 2.2% fall in the final quarter of last year.

Not surprisingly these figures were greeted with surprise. Not least because there is a broadening belief that construction is set for strong growth with concerns turning to skills shortages not lack of work opportunities.

The Daily Telegraph’s initial take, for instance, was placed under the headline: “British construction industry suffers shock pre-election collapse.” (the story attached to the link has been updated)

With the Government partners priding themselves on economic competence ahead of the General Election, the figures have taken on particular significance. That significance was magnified by weak industrial production data, heavily depressed by the troubled oil sector.

Whatever the take on the industrial production figures, there will, however, be eyebrows raised over the construction data.

The officially recorded decline in construction sits uneasily with other construction survey data.

So it’s worth looking at what might be behind the conflicting messages coming from the Office for National Statistics and business surveys, which are increasingly upbeat.

The first point I’d make is that there are problems with the official construction data. The issues around deflators are well recorded. Some of the practical problems were discussed in this earlier blog. This particular problem does make it awkward to interpret mid to longer-term trends, but it isn’t the cause of the recent decline in construction output that seems so in conflict with industry soundings.

While most assessments of construction output use seasonally and price adjusted data, to start unpicking what lies behind the recent fall in recorded activity it’s probably best to start by looking at output in current prices (cash terms). This eliminates the effects of statistical adjustments for seasonal effects and inflation.

Output in current pricesThe graph compares monthly output in cash terms for the periods February to February for various years. The first thing you see is the huge seasonal variation, with work steadily picking up through the year and falling pretty rapidly after October.

There are peculiarities in how data can reasonably be collected in construction, this means there is an irritatingly variable and unpredictable lag in how actual activity on the ground feeds through into the numbers recorded each month in the spreadsheets (see blog). So in reality the peak could actually be earlier than this graph suggests. But that isn’t a point worth dwelling on here.

One obvious point of note when comparing the five years is the much sharper drop in output in the months from the October peak to February in the latest data than in the previous two years, when we started to sense a recovery was on its way. Interestingly too, the drop is sharper than in the winter of 2010/11 and 2011/12 when the industry was suffering.

If construction was storming we’d expect the seasonal fall in current price output to be reduced for two reasons. Firstly there would be more work about increasingly lifting successive monthly figures. Secondly, because this is a cash measure, you might expect stronger inflation in wages and materials pushing up the cash price paid for a given amount of construction work. Conversely, if the growth rate slowed or there was a decline in activity we’d expect the fall to be sharper.

This by no means is guaranteed, as firms are tied into contract prices set a while ago. There will be long lag effects. Contracts won a few years ago at silly prices will be passing through the system. This might delay or depress inflation, but it seems very unlikely that it would cause a decline in the price of construction across the board. Certainly the deflators being used by the ONS don’t suggest falling prices, quite the reverse.

So whichever way we read it, the scale of the recent fall in activity at current prices is puzzling. It also raises nagging questions over what might be amiss. Is the data out of line with what’s happening in the real world? Is there a problem with the surveying or with how the survey data is scaling up from the sample?

To get a better feel we might compare the output statistics more closely with trade surveys. Were we to we’d almost certainly see a strong conflict with almost all trade surveys from those produced by the professionals, to those produced by the small builders.

This may provide a reason for concern, but the comparison is problematic for all kinds of reasons. Trade surveys tend not to measure the level of activity but what change firms are seeing in activity. They tend to cover bits of the industry and not the whole and there are inevitable problems with both the sampling and with issues such as cognitive bias, as sentiment plays such a large part in most trade surveys.

But there is an alternative. We could compare construction output with, say, the official employment data. Both surveys seek to track actual levels.

Here we find an immediate conflict. The jobs data, admittedly only up to December, all points to a rising number of workers in construction. All other things equal, this would suggest that workloads had been holding up.

That said while direct employment rose – which might be read as a sign of confidence in the future – there was a hint of a decline in self-employment, which may be an indicator of a short-term drop or slowdown in work. Although it’s probably the effect of firms taking on people directly.

But labour intensity is not even across construction so we need to look at which sectors are growing and which are falling.

The ONS data suggests growth is now driven by new work, while repair and maintenance work is flagging, even in cash terms. This shift in the workload mix should be associated with a reduction in the level of employment for any given volume of work. New work is far less labour intensive.

So rising employment combined with a shift to less labour intensive work points to growth in activity. So the construction output data again seem to be at odds with other data.

However, in an industry as muddled as construction there are plenty of ways you might square this apparent contradiction. One immediate point to make is that changes in employment tend to lag changes in workload. But, for me at least, the comparison of the employment and activity data does provide a bit of concern over whether there has been an under measurement of late in the work undertaken by contractors.

Despite these concerns, I’d be cautious of reading too much into this. The construction data are volatile and need to be considered over a reasonable time period. There are peculiarities in the data, such as an irritating variable and unpredictable lag mentioned early.

There are awkward issues around definitions of what is and isn’t construction and indeed tracking what gets included and what doesn’t. Furthermore construction work is undertaken directly by organisations not classified as construction. This will not be counted. So if organisations, such as housing associations, or businesses, such as supermarkets, start taking more work in house this will impact on the figures.

Another point worth noting is that significant amounts of work that the housing sector needed to do after the recession to rebuild stocks of work in progress and to get infrastructure in place on new sites. This kind of work is reined back during the recession and so with recovery we should expect a bubble of work to pass through the system as stocks are rebuilt.

There’s a fair chance that much of this repair work to the production pipeline has been done. So we should not be surprised by a levelling off or slowdown in housing-related work, even if more homes are being produced.

So while there is cause for concern over the recent data, there seems no need for panic, yet.

The forecasters foresee rising construction output over the next few years. This seems to me fair enough, even if we see a slight slump in recorded work in the short term.

But of course the other reading is that the excitement in the industry over the potential recovery has been a bit pumped up in people’s minds. The huge stimulus given to housing through, for example Help to Buy, does not provide a permanent fix. And it is the boost in house building that has so far underpinned the recovery in construction.

Historically sustained strong growth in construction has been linked to above average growth in the overall economic activity (see blog). If the next Government returned imposes tighter austerity measures, after the loosening of the grip we saw in 2012, this may lead to slower rather than faster growth in the economy.

That I suspect would constrain construction growth, however powerful the case is to refresh our nation’s infrastructure and boost the housing stock.

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.

 
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