From Boom to Bust

By Dave Senf
June 2011

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The Minnesota construction sector is still struggling to break out from the effects of the housing bust and the Great Recession.

While most Minnesota industrial sectors have slowly regained jobs that were lost during the Great Recession, construction continues to struggle, remaining severely depressed as construction spending, especially for housing, remains at historic lows. 

Minnesota construction employment climbed for 14 straight years from 1992 to 2006, fueled at first by a strong state economy and later by the housing bubble. Then the housing market collapsed, foreclosures soared, a financial meltdown occurred, and the economy tumbled into the deepest and longest recession since the Great Depression. Construction employment plummeted for five straight years.

Home prices in the metro, as measured by the Case-Shiller Index for the 13-county metro area, rose during the first half of the 1990s — while slipping slightly nationwide — as Minnesota’s economy weathered the 1990-91 recession in better shape than most of the country (see Figure 1).  Minnesota’s economy continued to outpace the national economy for most of the decade, creating a strong housing market in the state. House prices jumped 20 percent between 1990 and 1996 in the Twin Cities area but were down 5 percent nationally over the same period as measured by the 10-city composite Case-Shiller Index.

Then the boom phase of the housing bubble kicked in sometime between 1997 and 2002, and home prices skyrocketed in most areas of the country. Home values more than doubled in the Twin Cities between 1996 and 2006, but that was tame compared to places like San Diego, Las Vegas, and Miami, where home prices more than tripled in value.

The housing market frenzy ended in early 2006 when prices began a steep decline. The 10-city composite, 20-city composite, and the Minneapolis Case-Shiller home price indices all peaked in April 2006. Home values in the Twin Cities today are comparable to levels a decade ago, down 50 percent from the peak five years ago.

Construction employment in Minnesota followed the same path as home prices during the 1990s and through the housing boom and bust. Construction payroll numbers slipped in Minnesota during the 1990-91 recession, but the dip was shallower and shorter than nationally (Figure 2).  Minnesota’s robust economic growth during most of the 1990s spurred residential, commercial, and industrial building, fueling solid annual increases in the state’s construction workforce through the decade. Construction hiring was strongest from 1998 to 2000.

Payroll numbers at Minnesota construction firms continued to grow, albeit at a slower pace than during the 1990s, right through the 2001 recession and into the housing boom years before the bubble burst. Construction employment climbed to 4.8 percent of total payroll employment in Minnesota in 2004 and 2005, the highest percentage since 1970. The state’s share of annual average U.S. construction employment from 2002 through 2004 was among the highest recorded by Minnesota construction companies, topped only in 1954 and 1955.

Construction employment nationally inched downward after the 2001 recession before soaring for the next four years, with home building going into overdrive in the sand states — Florida, Arizona, Nevada, and California. Seasonally adjusted construction employment peaked nationally in April 2006, two months after Minnesota’s adjusted construction employment reached its peak of 132,000. Minnesota’s construction employment increased 80 percent from the lowest seasonally adjusted monthly total during the 1990-91 recession (November 1991) to its record high in February 2006. Construction across the nation increased 70 percent from the 2001 recession-related low in July 2002 to the national peak in April 2006. 

The drop off in construction work in Minnesota was steeper than nationally during 2006 and 2007. But once the financial meltdown occurred and the recession grew deeper and longer, construction work nosedived, even in areas of the country where housing had not boomed.    

Minnesota lost construction jobs at a rate comparable to the U.S. from 2008 to 2010.  Minnesota’s seasonally adjusted construction payroll decreased by 50,000 when calculated from the February 2006 peak to what might turn out as the low in January 2011. That’s a 37 percent plunge compared with the 5.7 percent overall employment decline during that period. Almost one-third of the jobs lost in Minnesota during the Great Recession were construction jobs, which evaporated at a rate that was six times faster than overall job loss.  

Construction workforce records were set in 20 states in 2006, 14 states in 2007, and eight states in 2008. Minnesota’s construction decline, from peak to February 2011 ranks as the 10th steepest (see Figure 3).  The peak-to-trough plunge for U.S. construction jobs was 29 percent, slightly less than Minnesota’s 37 percent slide. The rise and fall of Minnesota’s construction employment exceeded what happened nationally on the way up and on the way down. 

The net result is that Minnesota’s share of U.S. construction activity has dropped to levels last experienced during the 1980s. Minnesota’s construction sector’s health relative to the national picture is tracked for the last five decades in Figure 4 using Minnesota’s share of nationwide construction wage and salary employment and share of U.S. construction earnings.   Construction earnings combine compensation (paychecks plus benefits) for construction workers on a payroll and the income that self-employed construction workers earn.[1] Income earned by self-employed construction workers accounted for 30 percent of all Minnesota construction earnings during the height of the housing boom but has tailed off to below 24 percent in the last few quarters.

 Minnesota’s construction boom of the late 1990s and early 2000s looks comparable to the prosperous times enjoyed by the industry in the mid-1960s and last half of the 1970s. The state’s construction sector has also seen periods in the past when its share of the country’s workforce slipped to the current low level. The state’s low share of construction earnings over the last few years, however, suggests the state’s relative construction situation may be the most dismal over the last five decades. Self-employed construction income is down relative to the nation, and wage payments for Minnesota construction workers have declined faster than nationally.   Construction hours and wage rates have lost more ground in Minnesota than nationwide, an indicator that the Minnesota construction sector’s deep downturn is probably a degree or two worse than the national construction downturn. 

Unemployment rates for construction workers in Minnesota are both higher and lower than the national rates, depending on what one is referring to in that sector. Minnesota’s most current construction industry unemployment rate was 17.5 percent in 2009 compared with the national rate of 19.7 percent. The 2009 construction and extraction occupation unemployment rate in Minnesota was 19.9 percent compared with 19 percent nationwide (see Figure 5).

The difference between the two construction workforce unemployment rates is that not all jobs in the construction sector are construction occupations and not all construction occupation workers work in the construction sector. Two-third of construction sector employees work in construction occupations like carpentry, electrical work, construction supervising, and plumbing.  

The other one-third are spread across a variety of occupations such as office clerks, truck drivers, cost estimators, and accounts. In a similar vein, three-fourths of workers employed in construction occupations work within the construction sector, but the other one-fourth are employed in other industries. The largest employers of workers in construction occupations outside of the construction sector are local government (think road maintenance workers), state government, and temporary help services.

Industry and occupation construction unemployment estimates are available nationally each month but only on an annual basis for states.[2]  All of the unemployment estimates depend on the monthly Current Population Survey, which interviews 60,000 households nationally inquiring about the labor market activities of household members. About 1,300 Minnesota households are included in the survey, which is too small a sample to provide statistically reliable monthly unemployment estimates at the industry or occupation levels. Reliable annual estimates, however, can be calculated when monthly data are pooled. These have been published sporadically in the past by the Bureau of Labor Statistics. Another drawback to the unemployment estimates is the delay in publication, as 2010 state estimates have yet to be published. 

Minnesota’s construction industry and occupation unemployment rates most likely increased again in 2010, duplicating the uptick in the national construction rates, even though Minnesota’s overall unemployment rate retreated to 7.3 percent at the same time that the national rate rose to 9.6 percent. Despite Minnesota’s job market being a tad better than nationally, home-building activity showed no signs of recovery in Minnesota or nationally in 2010. Minnesota’s construction companies continued to cut jobs throughout 2010.

A quick glance at the 2009 annual unemployment rates by industry and occupational group in Minnesota underscores how harsh the housing collapse and Great Recession have been for the state’s construction workers (see Table 1). The 2009 unemployment rate for construction workers, viewed through either the industry or occupation lens, is 2½ times the overall rate and significantly above the rates of the industry and occupational group with the next highest unemployment rate. Unemployment rates for all industries and occupations except for construction likely dropped by varying degrees in 2010 as the overall unemployment rate gradually declined through 2010. 

Construction job growth after the double-dip recession of the early 1980s — the only other post-war recession that comes close to the Great Recession in depth and duration — helped lead that job rebound. The construction market back then benefited from falling mortgage rates and rising demand for housing as the middle of the baby boom generation moved into its home-buying years. No boost for a quick rebound in construction jobs is expected this time around as the fallout from the housing market collapse continues to be a drag on the economy.

[1] Self-employed construction earnings estimates of Bureau of Economic Analysis (BEA) “proprietors” income estimates for the construction sector. For more information see www.bea.gov/regional/definitions/nextpage.cfm?key=Nonfarm proprietors’ income.
[2] U.S. construction unemployment estimates are available in Tables A-13 and A-14 of the Employment Situation news release by the Bureau of Labor Statistics (BLS) at www.bls.gov/cps/cpsatabs.htm. Annual average industry and occupational unemployment estimates for states are at the BLS Geographic Profile Web page www.bls.gov/opub/gp/laugp.htm .

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