by Calculated Risk on 11/12/2007 12:10:00 PM

According to the BLS, residential construction employment has only declined 6.5% from the peak employment in 2006 (221,900 fewer jobs). This is surprising because housing completions are off about 37% from the peak.

Click on graph for larger image.

This graph shows starts, completions and residential construction employment. (starts are shifted 6 months into the future). Completions and residential construction employment were highly correlated, and Completions typically lag Starts by about 6 months.

The puzzle is why residential construction employment hasn't fallen further.

The following article from the Beaufort Gazette provides some clues: Housing meltdown hammers construction industry

Beekman Webb put a classified advertisement in the newspaper a couple of weeks ago for a carpenter's assistant and "had about 50 calls in three days."

"I was just covered up, and I was the only ad in the paper at the time looking for carpentry help," said Webb, who has his own Beaufort-based construction company.

"I had people from Hilton Head (Island) that told me they'd been in business for 15 years with a bunch of employees and now they're just looking for a job as a carpenter," he said.

The housing market slump has had a trickle-down effect on the area's residential construction industry, according to local builders. Gerald Neal, owner of Neal's Construction in Beaufort, first noticed the slowdown earlier this year.

"It's real tough times for those guys -- the (residential construction) subcontractors. They're having a rough time," he said.

The local commercial construction industry has not been hit quite as hard, according to Neal, which has made him change the way he operates his business.

"I used to do 20 percent commercial. Today, I do about 60 percent commercial, 40 (percent) residential," Neal said.

This hits on two of the explanations for the residential construction employment puzzle: many workers have moved to commercial work (note that Neal has moved from 20% percent commercial to 60% commercial), and many workers are underemployed.

Other possible reasons for the employment puzzle are that the BLS has not correctly accounted for illegal immigrants working in the construction industry, and the BLS Birth/Death model might have missed the turning point in residential construction employment.

There is some merit to to all of these arguments, and I think the answer will be some combination of these explanations. The concern now is that if commercial construction spending slows, as appears likely from the recent Fed loan survey, then workers that have moved to commercial construction will have no work opportunities.

This was the concern expressed by the director of forecasting of the NAHB in August. From Reuters: Construction job losses could top 1 million

"The ability of nonresidential to continue absorbing additional workers is going to be limited, and that's going to put downward pressure on construction employment overall," [Bernard Markstein, director of forecasting at the National Association of Home Builders] said, adding that cuts may be deeper than in the 1990s.