The various reports on the labor market this past week drew a clearer picture of what the employment situation is. Many observers were disappointed in the report from ADP on private payroll growth on Tuesday. Private employers added 362,000 jobs in July, well below expectations; however, the forecasts for hiring focused on growing demand and apparently discounted the shortage in worker supply. Below the headline number, private employers reported overwhelmingly that they had openings there were going unfilled. You can’t add to payrolls if you don’t have applicants.

Thursday’s report on unemployment claims was encouraging top to bottom. The headline showed first time claims declining by 14,000 to 385,000 compared to last week. Better news was the low number of layoffs, which fell to the lowest level in 21 years. The best news was the 11% drop in continuing unemployment claims. The 365,000 people who came of continuing unemployment insurance brought the number of long-term unemployed to 2.93 million.

Friday’s Employment Situation Summary – the July jobs report – was the icing on the cake. Employers added 943,000 workers in July, bringing the unemployment rate down to 5.4%. The total number of those unemployed or employed part-time instead of full-time remained 4.39 million higher than in February 2020, more than double the pre-pandemic number. That number is falling more rapidly than expected, however, and is now well below the number of job openings that exist. Most encouraging was that the number of employed part-time for economic reasons fell to 4.5 million, just 100,000 above the February 2020 level.

Job creation was strongest in the hospitality fields, with the normalized travel season creating demand for 380,000 workers. Local government education sector gained 221,000 jobs. That bodes well for a fall reopening of schools, which in turn will have a beneficial impact on the available workforce that left jobs to supervise school from home.

Economists had expected roughly 100,000 fewer jobs to be created in July. While cheering the employment gains, most cautioned that the employment and household surveys were done in mid-July, prior to the surge in infections and hospitalizations from the Delta variant. The recent surge has altered plans for return to office and slowed activity at restaurants and other leisure businesses; however, thus far the resurgent COVID-19 infections do not appear to be altering the accelerated return to normal business activity. Where the surge is likely to be felt in the short-term is in consumer activity, and there is some data suggesting that is happening.

One measure of consumer confidence, Morning Consult’s consumer survey, fell 4.6 points in July after the Delta variant took over. Willingness to eat at a restaurant fell several points during the month. The dent in consumer confidence and activity comes at the point that the individual safety nets established during the pandemic are wearing off. That may move more people back into the workforce in September, but it also exposes more people to economic insecurity at a time when an unchecked rise in COVID-19 cases dampens hiring and activity. How quickly this latest surge can be beaten back by increased vaccination will determine how much the Delta surge damages the economic recovery that is underway.

The New York Fed’s Quarterly Household Debt and Credit Report showed that consumer credit jumped to an all-time high of $14.9 trillion in the second quarter. The important takeaways were the robust finances of the U.S. consumer and the benefits of the CARES Act. The former reflects how well the majority of U.S. households fared during an extraordinary economic upheaval. The latter remains a work in progress, as much of the feared deterioration of loan portfolios is being avoided by the continued forbearance provisions in the CARES Act. Loans in forbearance, especially those which were a result of forbearance offered by private lenders, have been declining; however, avoiding future increases in delinquency and bankruptcy will depend upon good fortune in timing the recovery ahead of the end of forbearance periods. That’s the economic reason why ending the spread of the Delta variant quickly is so critical.

Regional residential construction soared in the 6-county metro Pittsburgh area during the first half of 2021. The number of developed residential lots still lags the demand but new subdivisions started in the past two years have opened up new construction to levels unseen since before the Great Recession. Housing starts overall increased by 43.9% year-over-year to 2,755 units. New construction was higher in single-family – both detached and attached – and multi-family. With another 1,200 or so units in the pipeline for start in the second half of the year, housing starts should exceed 6,000 units in Pittsburgh for the first time since 2013. In commercial construction news, Rycon Construction was low on the $12.4 million University of Pittsburgh-Greensburg Life Science Building.

Last week’s report on inflation seems to have triggered more fears than the report on March’s inflation, even though there was every reason to believe that prices were racing much higher as the economy raced ahead. The 4.2% jump in consumer prices (CPI) and 6.2% hike in producer prices (PPI) were remarkable only if compared to the consensus expectations for April’s inflation. The economy is bursting back open much faster than was anticipated just four months ago. The supply chain for virtually every product is disrupted and the labor force remains 3 million people smaller than the number of people working in February 2020. Soaring demand meets tight supply. That’s the simplest equation for price increases known to man. I’m not sure what model drove the lower expectations but there was runaway inflation in a handful of categories that all but assured a major (short-term) hike.

The counter argument against panicking about the April “surprise” is patience combined with capitalism. Imbalances in supply and demand exist to a greater degree than normal because of COVID-19 but those imbalances are already being addressed. Higher prices attract suppliers to increase supply and discourage consumers from purchasing. Eventually (or soon), equilibrium returns. There is a great commentary on the current inflation situation in this week’s Pensford letter. (I highly recommend subscribing if you don’t already.) Pensford distills the market pretty succinctly below:

Nearly 60% of the increase came from just five components – used cars, lodging, rental cars, airfare, and eating out.  Used cars and truck prices were up a staggering 10%, comprising almost a third of the total CPI jump.  That’s not sustainable over the long term.  Compared to April 2019 (two years ago), inflation is up 2.2%.

More likely, we are experiencing a temporary shock of re-opening all at once, just like we experienced a temporary shock of shutting down a year ago.  Remember when there was a toilet paper shortage?  Demand exceeded supply.  Same thing is happening now across multiple supply chains.  You think Chick-Fil-A won’t figure out how to fix its shortage of sauce?  These disruptions will be resolved.

Pensford notes that a key inflationary metric, the velocity of money, is definitely pointing away from inflation. Velocity is the number of times that a dollar (or unit of currency) is used to purchase goods or services domestically. If the Federal Reserve Bank increases the supply of money by buying bonds, inflation only occurs if the money is used to buy things and drive prices up. A look at the velocity of the money supply going back 40 years shows why inflation has been trending lower even in times of increased money supply, like in the early 2010s. This trend, like the others mentioned above, doesn’t guarantee that demand won’t squeeze out supply or drive wages upward into an inflationary cycle, but absent a sharp increase in the velocity of money, equilibrium in supply and demand will bring inflation back under 2% within this year.

Probably the simplest antidote for inflation panic is to remember that April’s prices were being compared against those from April 2020, a time when there was almost no demand because we were all hunkered down at home. Consumer prices in April 2021 were 2.2% higher than those of April 2019, just to give a bit of perspective and inspire a deep breath. It is possible that the CPI next April will be lower than last month’s, but that won’t mean we’re in a deflationary cycle.

Inflation in construction is a bit more panic-worthy. the dynamics of supply and demand are consistent with what we’re seeing in consumer prices but are exaggerated because manufacturing has been recovering for nearly nine months. the change in PPI for copper year-over-year is 49%, for steel it’s 67%, for lumber it’s 85.7%, and for diesel fuel it’s 126%. Scrap prices for iron, steel, and copper range from 77% to 79% higher than April 2020. Of the dozens of categories of materials tracked by the AGC, another 14 experienced double-digit increases. But, of all these categories, only lumber seems to be in danger of a long-term, secular shift in supply. And even lumber is likely to see prices fall back again in late summer, although probably not to the $460/thousand board foot levels of September 2020. Since May 10, in fact, the price has dropped 27%.

Inflation will recede as production catches back up to demand going into 2022. In the meantime, higher prices will cause construction projects to go on hold or to be cancelled. That’s not good for an industry in recovery but that trend will also reduce demand and hasten the point of equilibrium between supply and demand. The 9.5% drop in housing starts in April is an indicator that the shortage and price of lumber is already denting new residential construction.

Construction projects moving ahead in Pittsburgh despite the higher inflation include the $22 million Clairton Wastewater Treatment Plant Phase 2, which bids July 12, and the $25 million renovation of Verizon Wireless’s Bridgeville center. Walsh Construction is the CM for Verizon Wireless. New-Belle Construction started work on the $5 million Fossil Industries new facility in Hempfield Township. Rycon Construction was the low bidder on the $11 million Rolling Hills Aquatic Center in Peters Township. Dick Building Co. was awarded the contracts for new GetGo Stores in McKeesport and McKees Rocks. MBM Contracting will be the contractor for the buildout of Goehring Rutter & Boehm’s space in 525 William Penn Place. C.H. Schwertner & Son started construction on the new Target store at the Kaufmann’s Grand on Fifth. BRIDGES & Co. is building the new $3 million Dialysis Clinic Inc. facility on Perry Highway in McCandless. Extra Storage Space selected Brackenridge Construction for its $6.5 million, 65,000 square foot expansion in Homewood.

During the debate over the American Relief Plan, fiscal conservatives raised the worry that adding so much stimulus into the economy was a risk for overheating the economy and triggering inflation. Coming on the heels of a year in which gross domestic product (GDP) fell 3.5% (and almost 10 million people remain unemployed), a little overheating is probably not the most sellable worry. At the same time, there are signs that unusual inflation levels could be on the horizon. There isn’t much question in my mind that the relief included in the $1.9 trillion package was needed to get the U.S. economy to the other side of the pandemic later this spring or early summer, but there are positive indicators already that the economy is bouncing back. Government stimulus, whether in the form of direct payments or monetary policies like quantitative easing, are meant to be oxygen for the economic fire. If the aid ends up being gasoline instead, particularly in an environment that continues to have supply restraints, demand for goods and services can get so far ahead that raising prices is unavoidable. That’s a real concern and evidence of such overheating is widespread in the construction industry.

As Congress was debating the ARP, the Bureau of Labor Statistics released its inflation report for February. You can view a helpful table of key materials done by the AGC here. The headlines weren’t shocking but the overall producer price index (PPI) jumped 2.8% year-over-year. PPI growth for most construction-related indexes was relatively tame (the PPI for nonresidential buildings was at 1.2%) but there are smatterings of runaway inflation in several key materials. Industrial metals, especially steel, have seen big increases, as has diesel fuel. We’re talking about jumps of 20% to 45% year-over-year. Looking at the underlying causes of the inflation should calm your nerves. Manufacturing capacity was cut back last year and manufacturers let inventories run down. As production has been heating up in recent months, capacity utilization has climbed back to pre-pandemic levels for many basic industries. When the economic recovery kicks in higher gear in a few months, capacity would be swamped but manufacturers have already begun reopening plants. By the third quarter’s end, there is likely to be an excess capacity again in steel, aluminum, and fuel.

That’s good news, unless you have to price and procure a major project right now. The key worry about inflation at the moment is that out-of-whack supply and demand could produce pricing that breaks the budget on projects trying to get out of the starting gate this spring. Some of the projects won’t be able to get out of the way of the short-term spikes. For owners looking to get out of the ground in later 2021, don’t be hasty about the springtime budgets. There is no guarantee that prices will moderate by fall but it’s more likely that today’s prices will be higher than after mid-year.

The outlook for long-term inflation hasn’t much changed since last year. Fed Chair Jerome Powell tried very hard to express the central bank’s caution about raising rates too soon on Wednesday. He made a very good point about growth, which was that if interest rates are hiked earlier than expected because economic growth (especially job growth) is stronger than expected, that will be a good thing. Fears of inflation of the kind seen in the 1970s are otherwise unfounded. There are big differences in how the global economy works in the 2020s, most notably that the economy is global. Spikes in demand or supply shortages can be met by corporations across the world. That wasn’t the case in 1975. Materials that have tended to drive inflation spikes – industrial metals, oil, and gas – are in long-term secular oversupply cycles. Productivity is likewise less likely to balloon today. Fifty years of technology advances have leveled out the productivity gains that have pushed wages in the past. Inflation is a risk to the economy but, at the moment, a far lesser risk than the public health crisis.

Pittsburgh’s construction industry is rapidly heating up. The industrial market continues to expand. Miller-Valentine Group has started construction on the $15 million warehouse at Westport Woods for NorthPoint Development. Stefanik Properties LLC has started site work on the 150,000 Stefanik Industrial Park in Center Township, Beaver County. The $33 million Gateway Middle School project is out to bid. Elizabeth Township Municipal Authority awarded Mele & Mele & Sons $19.8 million in contracts for new pump stations. TBI Contracting has started work on the new $2.6 million Frontier Railroad HQ in Charleroi. Massaro Corp. was selected to renovate the 20th floor at Highmark’s headquarters. Mosites Construction will be the contractor for the $5 million renovation of The Depot in Tarentum. UPMC is taking proposals from Mascaro, Massaro, PJ Dick, Rycon, Turner, and Whiting-Turner on the $25 million Children’s Hospital Heart Vascular Institute. A. W. McCay is renovating Fox Chapel Plaza for the $2.5 million Goldfish Swim Club. Yarborough Development was awarded the $1.6 million Norwin High School Aquatic Facilities renovation.

Let’s start with the bad news. The number of people filing for first-time unemployment compensation continues to be high. Even as many other metrics of the economy are turning higher quickly (see below), unemployment claims remain stubbornly high. Last week’s total was down substantially from the week before, to 720,000, but the number of those on unemployment and extended unemployment stayed above one million for the week.

Now for the better news. Friday’s Employment Situation Summary (i.e. the monthly jobs report) was a big surprise to the upside. Here’s an excerpt from the National Outlook column from the upcoming March/April BreakingGround:

Employers added 379,000 jobs in February, boosted by a gain of 355,000 jobs in leisure and hospitality hiring and the decline in infections. That bodes well for a strong recovery mid-year if recent loosening of mitigation measures does not trigger another surge in infections in spring. Among the nuggets of information below the headline: the number of people working from home due to the virus outbreak declined by 0.6 points; labor force participation remained weak at 61.4 percent; and the number of people reported not working because their employer closed due to the pandemic fell by 1.5 million to 13.3 million.

Economic news is better because the outlook for the pandemic is better. More than 2 million new vaccines were administered on 3 different days last week, bringing the 7-day rolling average to just below 2 million per day. That pace is advancing even as the manufacturing of vaccines is still in the ramp up stage. The other big driver of optimism is the passage of the $1.9 trillion American Relief Act, which passed Congress today and will be signed shortly by Pres. Biden. The bill includes $1,400 direct payments to people making less than $80,000 per year (or $160,000 as a couple), funds more COVID vaccine distribution, and provides a $3,600 child credit for 2021. Economists watching the progress have significantly upped forecasts for growth this year, with some (like Goldman Sachs) predicting GDP growth of 6%. Those more upbeat forecasts rest primarily on the fact that the U.S. consumer’s life is going to get much better if the current arc of things continues. With 70% of GDP coming from consumer spending, the charts below demonstrate why the bolder predictions seem plausible. Personal savings are up. Wealth was conserved (and mostly increased) during the pandemic. And those with the greatest need for assistance are about to get it. There are long-term risks associated with the amount of government borrowing and spending that has been required to support the economy for the past year. If, as many predict, Americans respond to returning to something like normal later this year, inflationary pressures could arise and put pressure on the economy in 2022. For now, those concerns are on the back burner.

Pittsburgh’s construction economy had begun feeling this optimistic outlook a bit before last week, but last week was a good one for the market too. Ahead of reviewing its Institutional Master Plan with the Pittsburgh Planning Commission, the University of Pittsburgh moved several of its $100 million projects off the back burner. Two of the major projects on the upper campus, which Pitt is calling Victory Heights, will begin moving forward again. The Chilled Water Plant, which will be built by Turner/Mosites, will get a guaranteed maximum pricing round within the month and is scheduled to start construction in September. The Human Performance Center, for which Massaro/Gilbane is the CM, will be designed over the next year or so, with construction in fall 2022. Construction is expected to start in October 2021 on the Hillside Student Housing and Garage, which Mascaro Construction will build. Mascaro is also CM for the Student Recreation and Wellness Center that should begin in spring 2022.

In other college project news, Mosites Constrution took bids on the $45 million Forbes Beeler dormitory at CMU. Duquesne University short-listed Rycon Construction and PJ Dick as CM finalists for the $50 million College of Osteopathic Medicine. Turner Construction was awarded the $8 million Google third floor renovation at Bakery Square. Shannon Construction was selected for the $3.8 million TI for Intervala at RIDC Westmoreland. F. J. Busse Co. will build out the new $1.5 million Huntington National Bank branch in the Strip District. Landau Building Co. was awarded the new Bank of America branch in Bridgeville. AIMS Construction was selectedfor the $1.2 million Africana Studies renovation at Pitt. Wyatt Inc. announced that it will build a new 120,000 square foot millwork manufacturing facility in South Huntingdon Township, Westmoreland Co. Whiting-Turner started construction on the 120,000 square foot buildout of the Goodblend cannabis facility at the Northside Commerce Center. Whiting-Turner also took bids on a $100 million buildout for Krystal Labs in Moon Township. Massaro Corp. was selected as CM for the $50 million Fifth & Dinwiddie West development in the Hill District. Rocky Bleier Construction Group started work on the $5-8 million Richard G. Laube Cancer Center expansion at Armstrong County Memorial Hospital.

In the public sector the airport’s Terminal Modernization Program got a kick start with the release of an $85 million steel and concrete decks package, due April 14. The Port Authority also released a $17 million Light Rail Transit Station renovation program, due April 1.