Overheated job market defies Fed's rate push even as construction openings fall

The most aggressive rate hiking cycle in Federal Reserve history has yet to cool the overheated US labor market, even as early cracks emerge in the construction sector.

January job openings in construction, a gauge for broader job market trends, fell by 49.2%, or 240,000 fewer positions, according to the latest government data, as rising interest rates curb new housing starts. Across sectors, job openings fell to 10.8 million during the month, down from a peak of 12 million in March 2022.

The drop in construction openings would typically signal that the Fed's work to raise benchmark interest rates by 475 basis points in 2022 is starting to tame the labor market, where employers continue to add hundreds of thousands of workers each month, while a shortage of workers persists. Yet economists say the fresh data may be a false dawn amid record employment, rising wages and employers hoarding labor in construction that all indicate the Fed has yet to turn the tide in its battle to bring inflation down to 2%.

"There are straws in the wind showing some cooling but it's still hot," said Chris Varvares, co-head of US economics at S&P Global Market Intelligence.

Fed's battle with inflation

The Fed is battling to rebalance a labor market that had 5.1 million more job openings than people seeking work in January, a historically high level, though down from 5.5 million in December 2022. The disparity in the labor market has given workers the bargaining power to demand higher wages, which have contributed to persistent inflation.

Rising rates pass through into residential construction more quickly than other sectors of the economy with a more immediate effect on the labor market. The Fed's rapid rate hikes have pushed the average 15-year fixed mortgage rate up to 5.9% from about 2% in 2021, making housing less affordable and reducing demand for new residential buildings.

Still, the construction sector is in the middle of a post-COVID-19 upturn, when sustained, ultra-low interest rates fueled a boom in demand.

"Right now, there's a lot of demand for manufacturing plants, for data centers, semiconductor plants, energy projects, and there's a large amount of federal money for infrastructure projects," said Ken Simonson, chief economist at the Associated General Contractors of America. "Contractors are still experiencing full order books … they just don't have enough workers."

More than 7.9 million Americans were employed in a construction job in February, an all-time high and a 21% increase from the pandemic low in April 2020.

The phenomenon is nationwide. Construction employment increased in 306 of 358 US metro areas between January 2022 and January 2023, according to an analysis by the Associated General Contractors released March 17. The group is lobbying the federal government to ease restrictions on foreign-born workers to address the labor shortfall.

Employment continues to rise throughout all construction sectors, although it is slowing. The number of workers in residential building construction grew 3.1% from February 2022 to February 2023. A year earlier, this segment of the construction workforce jumped 7.2% annually, peaking at 8.1% in 2022.

Similarly, the number of Americans employed as residential specialty trade contractors was up 2.7% from February 2022 to February 2023. A year earlier, this category grew 5.9% annually.

Yet the slowdown better reflects a persistent mismatch between labor demand and supply rather than a slowing economy.

"People are still hiring, but labor is still pretty scarce," said Zack Fritz, an economist with Associated Builders and Contractors, a trade group.

Lack of workers

Builders have attempted to lure workers through higher pay, causing average hourly earnings in construction to climb nearly 6% annually in November 2022. However, the pace of growth has now stabilized, falling to 5.3% in January and February.

For the past five months, construction has added jobs at a faster pace than the overall economy. Unemployment in construction was 6.6% in February, the third-lowest rate on record for February. The Fed's efforts to slow the economy have yet to be felt in construction, Fritz said.

"At some point, we're probably going to feel these impacts, but the data, at least, we're not really seeing signs of it yet," Fritz said.

Higher interest rates are unlikely to impact the industry much in the near term due to a backlog of projects builders need to complete. In addition, months of supply chain snarls and delays led to a wave of delays on construction projects currently underway.

"Since they're still under construction, it necessitates workers," said Charles Dougherty, a senior economist at Wells Fargo. "The construction labor market is very tight and it's going to get tighter."