A multitude of useful construction data was released last week. In addition to overall construction spending, public construction spending, and total housing starts, it is perhaps equally as telling to examine construction per capita, and construction as a percentage of GDP. These metrics are necessary to assess real estate development within a slightly more realistic context. Construction is a very cyclical industry, and periods of high economic growth can be associated with both high and low levels of construction. Similarly, strong construction performance does not necessarily translate to strong economic performance. In this way, examining raw construction numbers alone can be deceptive. As one can see from the graph below, private development projects contributed as much as 5.1% to annual GDP growth in 2006. Coinciding with the economic downturn in 2008 and 2009, construction, as a percentage of GDP, experienced a precipitous decline of its own. It bottomed at 3.5% in 2011, but has recovered only to about 4.2%. This metric has only been kept since 2005, so there isn’t an effective way of comparing recent trends with reliable historical data. All we can tell is that private construction expenditures have not only failed to recover to previous highs in nominal terms, but also has not returned to its previous proportion of the country’s economic output. It is important to note that nonresidential private spending has, in fact, surpassed previous levels, though residential development has come nowhere close. Additionally, one will notice that public construction has remained largely stagnant since 2011, and has similarly remained below peak levels.
Furthermore, it is revealing to consider construction within the context of population growth. Equivalent levels of construction at two distinct points can be differentiated by examining construction per capita. This gives a better indication of overall economic health. 1.205 Billion dollars were spent on total construction in February of 2006, which, following the economic collapse of 2008, has only recovered to about 1.189 billion in November and December of 2016. FRED does not have any record of construction spending per capita, so comparisons must be calculated manually. The population was approximately 325,268,000 in December, which means that there was $3.655 spent on construction per capita. The population in February of 2011 was 311,203,000, resulting in $3.86 of total construction per capita. This gap is even more conspicuous when considering that greater construction spending occurred in a smaller economy with a smaller population. This could have many implications. Of course, it is well known that the availability of subprime mortgages contributed to greater home construction before the crash. However, it is also true that demographic pressures to economic growth may slow real estate development as well. American workforce participation is historically low, and the proportion of working age people to the general population continues to dwindle due to aging baby boomers. In any case, both of these numbers show us that development has not quite recovered to its previous high.