How Advanced Analytics Are Shaping Workforce Strategies
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In this episode of Navigating the Currents of Change, host Shaheen Chohan is joined by Michael Bergen, Executive Vice President, and Chris Smith, Vice President of Labor Analytics at IIR. Together, they break down what’s happening in the labor market and how companies can better anticipate workforce challenges.
Shaheen Chohan (00:17):
Hello and welcome. This podcast is brought to you by Industrial Info Resources. Since 1983, we have been providing global market intelligence on the industrial and the energy markets. And through the combination of our trusted data, which is validated and qualified direct from source, and our analytics and forecasting tools and solutions, we help our customers stay connected and in tune with the latest project and investment opportunities and those trends occurring across the world. My name is Shaheen Chohan and I am the Vice President of Global Analytics at Industrial Info Resources. I'm based in our Dubai office and have been with the company now for almost 15 years.
I'm delighted to be joined today by two fellow members of our market analytics team. Firstly, I'd like to introduce Mike Bergen, Executive Vice President. And also here today is Chris Smith, our VP of Labor Analytics. Welcome, gentlemen.
Before we dive into the discussion and the insights, I would like to say a very big thank you to Kodiak, today's podcast sponsor. Kodiak serves large-scale commercial and industrial contractors, providing them with tenured professionals ranging from engineers, project managers, modelers to electricians, pipe welders and pipe fitters, experienced in both projects such as mission-critical refineries, hospitals, semiconductor plants, and others.
Now, Chris, before we kind of get into the meat of the discussion and dive into those trends, I'd like you to perhaps just explain a little bit about the products and services that sit within the labor analytics service that you offer our clients and customers.
Chris Smith (02:07):
Industrial Info Resources are tracking projects across the globe, following the spending for capital maintenance and turnarounds. And we're able to understand through our modeling process the demand that comes along with that — you need people to do those jobs. Industrial Info Resources is tracking that activity across the globe, and we're able to identify what crafts are needed, when they're needed, how many are needed. And then we further go in and do some more research, identifying the supply, finding out where the people are located, how many people are needed in those areas. And then we formulate that to help identify if there are any labor constraints or deficits of people, and whether that is causing labor pressure in the area. With that, we provide that information to our clients so they can better plan their projects and identify where they're going to have challenges or have opportunities to find people.
Then we further go in and call contractors and EPC firms in that area and find out what the wages are — we want to understand what's being paid, whether there's per diem needed, things of that nature. By doing all of this, we're able to identify if there's going to be any wage escalation due to labor pressures, or whether they're going to be able to fill the project needs with the local craftsmen. We then put that into various methods of delivery, one being our labor analytics platform, where we're able to look at labor overview for different areas, compare wages across different areas, look at the supply in an area, assess whether it will be enough, and look at risk analysis — to say, if I'm going to see problems in this area, will I need to increase wages? How will I be able to get people to the job site?
We have a tool called Supply Surge — it's basically looking at where the supply is located. If I'm in, let's say, the Gulf Coast region of Texas, can I pull people from the West Coast? Can I pull them from up northeast? Things of that nature. And then we have several other tools, more on the pricing aspect. One of them is called the cost estimator — we can look at an area, we know what the wages are in that area, we know what the supply is, and we can tell you what that project is going to cost you based on the number of people you're going to need and the duration of the project. So that's a really good tool that will help planners see on a budgeting aspect what their costs are going to be.
Shaheen Chohan (04:40):
Yes. So this is basically blending in your primary research in the field and then blending it with our underlying data and our forecasting, which actually, Mike, I know that you have a big hand in — the industrial spending forecast that we produce every quarter. And just to explain a little bit about that: our forecast model is based on a bottom-up methodology, using all of those projects and plants that our researchers are tracking on a daily basis, but also the top-down modeling aspect — so you're using macroeconomic indicators, GDP, CPI index, etc. We are going to be talking a lot more about uncovering the true picture of whether the market is ultimately balanced, short, or oversupplied from a labor perspective. But my big question to you, Mike, because I know you take a big macro view — conditions aren't exactly ideal. There's a lot of uncertainty baked into the market at the moment, and so that will clearly be causing a little bit of concern not only for project owners but for the investors of those projects. Do you think the current outlook is going to impact and maybe soften some of the capital spending that was previously sitting in the pipeline?
Michael Bergen (06:04):
You know, I guess at the start of the year, going back to what we experienced before COVID, we had a pretty big industrial process expansion that took place, and that took a lot of pipefitters, welders, and electricians to actually build out these complexes. Since COVID, we had introduced the IRA, the Infrastructure Bill, and the Chips Act, and that was a dynamic shift from the Gulf Coast out into other parts of the country to see construction build-out for these mega projects. And that was around decarbonization, electric vehicle manufacturing, batteries, and so on and so forth. That wave took us into a new era of not only inflation that's been built into this spending forecast scenario, but also just more demand for labor across the country.
So today we entered into a new administration with Trump 2.0. The outlook looked very promising in the beginning. We knew he was campaigning on tariffs and being able to implement that and correct the playing field, if you will. So new trading policies are in place, and that has taken quite a bit of a shock to the economy right now and to the expectation of where things are going to go. So we have this built-up uncertainty that's happening in the economic picture. But we also have this other dynamic that's happening with announcements of new manufacturing coming back into the States. And so while we have this layer of incentives put in place by the previous administration, we now have this other incentive amping up reshoring here into the States. And so I believe ultimately we're just building on the stress that's in the labor market right now by introducing some of these really large projects that are being announced right now.
Shaheen Chohan (08:00):
So just stepping back from what you've just said — would you say, Chris, that labor markets are balanced, oversupplied, or are we really tight at the moment? Because, Mike, as you said, if we do see this wave of reshoring and incentivized foreign direct investment into the US, with new facilities and new factories being built by foreign companies, will the labor markets be able to accommodate that?
Chris Smith (08:30):
Well, no, not at all, because we have a huge shortage as it is right now. As Mike was just saying, this reshoring and onshoring of these projects is just adding to the demand that's already out there. And so you're going to have these investments going in, including what we're already seeing with semiconductors and data centers, which is compounding the problem with demand — while our supply has not been where it needed to be for many years. And the biggest thing we're seeing is the retirement of those folks leaving the jobs out there, with young folks not coming in to refill that.
Shaheen Chohan (09:10):
And I suppose, did we see a spike or a shift in the supply-demand balance — certainly the supply side of the market — during COVID? Did we see a lot of people exit the market and just not come back post-COVID?
Chris Smith (09:22):
Yeah, absolutely. So what happened was — whenever all the subsidies were happening out there and the government was just giving money away left and right — there were a lot of folks who said, hey, if I can live off of this, I can maybe stop working out in the heat, stop working out in the weather, stop working hard. They lived off those subsidies until they ran out, and by that time they'd already changed their lifestyle and were working for less money doing other things, or migrating to other industries or jobs — working in healthcare or things of that nature. And so that further compounded the problem. And so we haven't recovered from that, nor have we recovered from the fact that — I've had a history of working out in the plants — during my time working in the plants, I had never had a helper to train and pass my knowledge on to. That was because plant owners and contractors only wanted journeyman-level craftsmen to do the job. And so they created this vacuum that they have not been able to fill. And then families wanting their kids to go to college, get a four-year degree — that has created that gap that we have in the supply, as well as training programs that are really not scaling fast enough to put these folks out into the workforce. So you do have training programs out there, but there's just not enough people going through them to fill that gap. So we've got a challenge far into the future.
Shaheen Chohan (10:47):
Mike, I'd like to come back to one statement you made about prior years — all of that major CapEx was concentrated, I think you said, on the Gulf Coast, right? Now you're saying that some of these really quite big mega projects are across the US — so it's no longer a concentrated demand profile. It's pretty much east to west, north to south of the US. Is that creating a new set of challenges when it comes to procuring and sourcing labor?
Michael Bergen (11:20):
Yeah, absolutely. Because you had a concentration of labor that was sitting down here in the Gulf Coast region. And what we identify in our supply and demand dynamics is the travelers making up the shortfall that are out there. And in the years that I've been doing this, I haven't seen something build up so rapidly and at such a high level as the build-out of data centers — that AI infrastructure that's being proposed and built out. We witnessed about $50 billion being executed last year. We're expecting probably about a $78 billion data center build-out this year. And we do see that continuing on through — which is, you know, this uncertainty that's in the market right now — but that is scattered across the country. It really originated from up in Virginia, Texas, Arizona, all over the south. Now we're starting to see data centers pop up trying to find homes in areas where they can embrace power, because power is a big component of that, but also just the land and the support for the data center. And they're looking everywhere.
Shaheen Chohan (12:35):
No disrespect to anybody who constructs data centers — if you look at the physical aspect of the infrastructure to the untrained eye, they seem fairly simple builds, right, compared to let's say a mega ethylene plant, which is clearly a highly complex piece of infrastructure that clearly required a very wide palette of craft labor types. Are you, Chris, seeing some specific pinch points — real supply issues — when it comes to specific crafts?
Chris Smith (13:03):
They require a lot of electricians for those. And so, as Mike was saying about drawing travelers out, some of those travelers going to these other projects — you've got to remember you're taking that person away from the local area that they live in, and now you're creating a deficit there. As you were saying, there's a lot of work in the Gulf Coast. Now, the areas where these data centers are — a lot of those folks had moved to the Gulf Coast to work. Now some of them are going back, but when they're doing that you are taking those electricians, carpenters, scaffold builders, some of your soft trades that are going up there to do tilt-wall buildings on a lot of that. So you use a lot of those trades — your civil crafts — and they're drawing those away from the Gulf Coast and from other areas because they're really paying good wages. They've got to draw them there, and they've almost got an open checkbook to say we're going to pay what we need to, because they've really invested a lot of money in building those data centers. And so they are really sucking those trades off of other areas.
Shaheen Chohan (14:07):
And that's an important point to make — the mechanical trades are still very big in this, because you have a lot of infrastructure needed for mechanical, which relates to all the power generation backup units they have to put in, but also the cooling systems, HVAC and so forth. And so that complex, while it looks commercial, has a lot of industrial features to it.
On top of that, you have big money being thrown out there — Meta, Google, Amazon — and they're willing to pay longer per diems and higher wages. And we know that folks in the construction industry, tradesmen, like to move where the money is. They can be attracted by simply a dollar more an hour. So what has this supply-demand imbalance done to wages?
Chris Smith (15:07):
Definitely it causes them to increase. So when you're competing with those types of wages, you're again trying to draw workers to your refining, to your petrochemical — and you're just like LNG, which pays really well. So we were talking to a client yesterday and they're like, we really struggling. We can't pay per diem seven days. We can't pay three more dollars an hour, because these data centers are drawing from us, and the LNG projects are drawing from us. And so all that does — on top of this shortage, on top of the lack of skill — is cause wages to go up, because these skilled craftsmen can demand what they want. They're basically writing their own check. It just drives wages up. And so companies are trying to control that by using per diem on seven days, as Mike was talking about, but also bonuses, job completion incentives, safety incentives, things of that nature.
Shaheen Chohan (16:07):
Which is all cost. Going back to it — wage inflation is the byproduct of the supply-demand imbalance. But the question I do have is: project owners are willing to spend, so they're going to have to spend to attract the right talent. It's a very competitive market. Do we actually see projects slip, get postponed — schedules having to be adjusted simply off the back of a lack of supply of the right labor?
Chris Smith (16:38):
Yeah, absolutely. And some of those direct impacts, just as you say, are delays. The other thing is productivity — how is the productivity? You've got less skilled guys going in there, you're hiring a bunch of people, but among all those people you may have one good skilled person who has to deal with four or five other unskilled or lesser-skilled people, which takes his time away from doing the buying, the productivity, and maybe leads to rework. Safety issues — we've seen in the news recently a pretty serious incident on a project due to the lack of skill.
Shaheen Chohan (17:21):
The data, the analysis, and the insights that you provide — this is useful content for, I guess, EPCs as well as project owners. Are they pretty much the two target end users, and do they use it in a slightly different way?
Chris Smith (17:32):
They do, they do. There are different ways to employ this information. A lot of times plant owners are using it to look at their projects and plan them — when are we seeing the peaks of demand, do I need to move my project out, do I need to move it forward? The other way they're using our information is to look at wages — when they're looking at their contracts, are we getting charged too much, or are we coming in with a bid that's too high, or is the bid not enough? If the bid is not enough and they're not paying their people enough, they're not going to be able to staff it. And then on these longer-term projects, it's about what are we forecasting — so we're forecasting these wages out five years. You can take a look at our forecast and say, okay, if I'm paying X dollars now, three years from now when we're at peak with our project, are we going to be in the right place with what we're paying now? Do we build in wage increases? What do we need to do to maintain and retain these folks?
And then on the other side with the contractors, it is going in there and saying, hey, we've got to pay this much — there's a deficit, this is why we're at where we are. And that makes for a good conversation between the owners and the contractors. And most importantly, we are a third-party resource — another data point for them to look at, because we survey a lot of contractors to gather wages every quarter, and we can present that to the owner and the contractor. They can see this independent wage survey and say, look, this is what the market's saying. It's not what the contractor is dictating or the owner wants to pay — it's what the market is dictating. And so that creates a better atmosphere for them to develop a strategy moving forward on retaining people on the job site and getting the project done on time.
Shaheen Chohan (19:33):
I know we go very deep into the US and the Canadian market — our service covers Canada as well, labor supply and wages in Canada. Any other geographies do we serve clients in?
Chris Smith (19:44):
Yeah, so we can provide labor demand information on a global scale.
Michael Bergen (19:57):
Yeah. I think it's important to come back to the question about where we stand right now. Because while we're talking about the constraints in the labor market and thinking about whether the economy is actually going to relieve some of that — what we've heard from Chris is that there is a shortfall and we haven't been very good at actually trying to build back up that inventory of workers and getting enough people on the ground doing it.
When we look at where we're at today, we started the year with a record number of projects in the pipeline. And we anticipated that because when we go back to the last two presidential elections, we saw the uncertainty build up in those election years — projects were stalled, they got pushed into the next year. We went to a record $900-plus billion worth of project start construction in the US this year. There was a little bit of stalling because of uncertainty around the election — so some of that spending got pushed into this year. We kind of got a little bit of a sugar rush from the new administration. But now we've got this next wave of uncertainty, which is slowing things down again.
And so when you look at IIR's Project Spending Index — which basically measures the pipeline of projects out there — we're up through the first quarter 16% over last year, showing the health of the industry and the sentiment of owners and their project activity. But if you look at the construction starts data — actual projects that made it through FID and are in the field in construction — the first quarter was down like 30%. And so that is the ramification of the tariff discussion, even before we got to April 2nd. And so when you mix those two together and try to read what's going on, you have owners sitting there waiting for the tariff policies to be settled to see which direction they're going to take their projects. But no decisions have been made to really cancel projects or put them on hold in an impactful way that we would say there's a slowdown in this industrial economy.
Shaheen Chohan (22:10):
Which is good news, because ultimately what that is demonstrating is that the demand for that physical project — the rationale for that project — has not dissipated at all. It's really just about timing now. And this may be a 90-day duration where we just may see people sort of sit on their hands until we start to see some of these bilateral agreements between the US and some of these trade partners come through.
Michael Bergen (22:38):
It is definitely a cost scenario — because if you're bringing equipment over from overseas, you're going to be paying higher tariffs, and it could be different three months from now. And so I think that is one of the reasons why we are seeing projects just get pushed out a little bit in time, but not to the next year.
So right now we've still got $845 billion sitting in the pipeline for this year to start construction. When we look at what is driving spending this year from a mega-project perspective, data centers are like the core of this thing. And then off that you have beneficiaries — power being one of them. Obviously we talked about natural gas power generation, transmission and distribution, but even the semiconductor market. While there's been talk about the IRA repealing and the Chips Act repealing, there's now favorable discussion about how do we restructure the Chips Act — and the Chips Act is still in situ, everything is still in place. That battle has not gone forward. And it may not, because we're entering into midterms, and I don't think we're going to see any repeal passed in Congress before then.
But all in all, there are industries that sit outside this data center market that are in position to continue on growth regardless of what happens in the macroeconomic picture. So macroeconomic picture, industrial economic picture — this is looking pretty sound with some hiccups this first quarter. But I think that we're moving into another era, another bubble being built out with reshoring. Right now we've captured $258 billion worth of projects out of the $2 trillion that's been announced for investments back here in the States — and that's across pharmaceuticals, semiconductors, data centers, power generation, mining projects. And those are reality. You know, GE Aerospace said that they're subject to like $800 million worth of tariffs on their manufacturing site outside of the States, so they announced a $1 billion investment here in the States to manufacture. So we're expected to see more of that coming out.
Shaheen Chohan (25:04):
Chris, so in closing, it looks like a big pipeline, a wave is coming. In terms of that supply-demand imbalance, it doesn't seem like it's going to get fixed anytime soon — going to be a tight market. Would that be fair to say?
Chris Smith (25:19):
Absolutely. As I said earlier, we're not out of the water — it's getting deeper.
Shaheen Chohan (25:26):
Okay. Well, gentlemen, I think that brings us to the conclusion of the podcast. A big thanks to both of you for sharing your insights and your perspectives — really valuable stuff. For those who've tuned in today, if any of you have any specific questions about any of the topics that you heard from Mike or Chris, then please do reach out directly to us. And of course, a very big thank you to Kodiak, our sponsor today — please do take some time to take a look at their website and see what these guys do, and do reach out to them. And finally, thank you for joining us. I hope we have helped you better navigate some of the currents of change that we're seeing currently. Thank you everybody.
Hello and welcome. This podcast is brought to you by Industrial Info Resources. Since 1983, we have been providing global market intelligence on the industrial and the energy markets. And through the combination of our trusted data, which is validated and qualified direct from source, and our analytics and forecasting tools and solutions, we help our customers stay connected and in tune with the latest project and investment opportunities and those trends occurring across the world. My name is Shaheen Chohan and I am the Vice President of Global Analytics at Industrial Info Resources. I'm based in our Dubai office and have been with the company now for almost 15 years.
I'm delighted to be joined today by two fellow members of our market analytics team. Firstly, I'd like to introduce Mike Bergen, Executive Vice President. And also here today is Chris Smith, our VP of Labor Analytics. Welcome, gentlemen.
Before we dive into the discussion and the insights, I would like to say a very big thank you to Kodiak, today's podcast sponsor. Kodiak serves large-scale commercial and industrial contractors, providing them with tenured professionals ranging from engineers, project managers, modelers to electricians, pipe welders and pipe fitters, experienced in both projects such as mission-critical refineries, hospitals, semiconductor plants, and others.
Now, Chris, before we kind of get into the meat of the discussion and dive into those trends, I'd like you to perhaps just explain a little bit about the products and services that sit within the labor analytics service that you offer our clients and customers.
Chris Smith (02:07):
Industrial Info Resources are tracking projects across the globe, following the spending for capital maintenance and turnarounds. And we're able to understand through our modeling process the demand that comes along with that — you need people to do those jobs. Industrial Info Resources is tracking that activity across the globe, and we're able to identify what crafts are needed, when they're needed, how many are needed. And then we further go in and do some more research, identifying the supply, finding out where the people are located, how many people are needed in those areas. And then we formulate that to help identify if there are any labor constraints or deficits of people, and whether that is causing labor pressure in the area. With that, we provide that information to our clients so they can better plan their projects and identify where they're going to have challenges or have opportunities to find people.
Then we further go in and call contractors and EPC firms in that area and find out what the wages are — we want to understand what's being paid, whether there's per diem needed, things of that nature. By doing all of this, we're able to identify if there's going to be any wage escalation due to labor pressures, or whether they're going to be able to fill the project needs with the local craftsmen. We then put that into various methods of delivery, one being our labor analytics platform, where we're able to look at labor overview for different areas, compare wages across different areas, look at the supply in an area, assess whether it will be enough, and look at risk analysis — to say, if I'm going to see problems in this area, will I need to increase wages? How will I be able to get people to the job site?
We have a tool called Supply Surge — it's basically looking at where the supply is located. If I'm in, let's say, the Gulf Coast region of Texas, can I pull people from the West Coast? Can I pull them from up northeast? Things of that nature. And then we have several other tools, more on the pricing aspect. One of them is called the cost estimator — we can look at an area, we know what the wages are in that area, we know what the supply is, and we can tell you what that project is going to cost you based on the number of people you're going to need and the duration of the project. So that's a really good tool that will help planners see on a budgeting aspect what their costs are going to be.
Shaheen Chohan (04:40):
Yes. So this is basically blending in your primary research in the field and then blending it with our underlying data and our forecasting, which actually, Mike, I know that you have a big hand in — the industrial spending forecast that we produce every quarter. And just to explain a little bit about that: our forecast model is based on a bottom-up methodology, using all of those projects and plants that our researchers are tracking on a daily basis, but also the top-down modeling aspect — so you're using macroeconomic indicators, GDP, CPI index, etc. We are going to be talking a lot more about uncovering the true picture of whether the market is ultimately balanced, short, or oversupplied from a labor perspective. But my big question to you, Mike, because I know you take a big macro view — conditions aren't exactly ideal. There's a lot of uncertainty baked into the market at the moment, and so that will clearly be causing a little bit of concern not only for project owners but for the investors of those projects. Do you think the current outlook is going to impact and maybe soften some of the capital spending that was previously sitting in the pipeline?
Michael Bergen (06:04):
You know, I guess at the start of the year, going back to what we experienced before COVID, we had a pretty big industrial process expansion that took place, and that took a lot of pipefitters, welders, and electricians to actually build out these complexes. Since COVID, we had introduced the IRA, the Infrastructure Bill, and the Chips Act, and that was a dynamic shift from the Gulf Coast out into other parts of the country to see construction build-out for these mega projects. And that was around decarbonization, electric vehicle manufacturing, batteries, and so on and so forth. That wave took us into a new era of not only inflation that's been built into this spending forecast scenario, but also just more demand for labor across the country.
So today we entered into a new administration with Trump 2.0. The outlook looked very promising in the beginning. We knew he was campaigning on tariffs and being able to implement that and correct the playing field, if you will. So new trading policies are in place, and that has taken quite a bit of a shock to the economy right now and to the expectation of where things are going to go. So we have this built-up uncertainty that's happening in the economic picture. But we also have this other dynamic that's happening with announcements of new manufacturing coming back into the States. And so while we have this layer of incentives put in place by the previous administration, we now have this other incentive amping up reshoring here into the States. And so I believe ultimately we're just building on the stress that's in the labor market right now by introducing some of these really large projects that are being announced right now.
Shaheen Chohan (08:00):
So just stepping back from what you've just said — would you say, Chris, that labor markets are balanced, oversupplied, or are we really tight at the moment? Because, Mike, as you said, if we do see this wave of reshoring and incentivized foreign direct investment into the US, with new facilities and new factories being built by foreign companies, will the labor markets be able to accommodate that?
Chris Smith (08:30):
Well, no, not at all, because we have a huge shortage as it is right now. As Mike was just saying, this reshoring and onshoring of these projects is just adding to the demand that's already out there. And so you're going to have these investments going in, including what we're already seeing with semiconductors and data centers, which is compounding the problem with demand — while our supply has not been where it needed to be for many years. And the biggest thing we're seeing is the retirement of those folks leaving the jobs out there, with young folks not coming in to refill that.
Shaheen Chohan (09:10):
And I suppose, did we see a spike or a shift in the supply-demand balance — certainly the supply side of the market — during COVID? Did we see a lot of people exit the market and just not come back post-COVID?
Chris Smith (09:22):
Yeah, absolutely. So what happened was — whenever all the subsidies were happening out there and the government was just giving money away left and right — there were a lot of folks who said, hey, if I can live off of this, I can maybe stop working out in the heat, stop working out in the weather, stop working hard. They lived off those subsidies until they ran out, and by that time they'd already changed their lifestyle and were working for less money doing other things, or migrating to other industries or jobs — working in healthcare or things of that nature. And so that further compounded the problem. And so we haven't recovered from that, nor have we recovered from the fact that — I've had a history of working out in the plants — during my time working in the plants, I had never had a helper to train and pass my knowledge on to. That was because plant owners and contractors only wanted journeyman-level craftsmen to do the job. And so they created this vacuum that they have not been able to fill. And then families wanting their kids to go to college, get a four-year degree — that has created that gap that we have in the supply, as well as training programs that are really not scaling fast enough to put these folks out into the workforce. So you do have training programs out there, but there's just not enough people going through them to fill that gap. So we've got a challenge far into the future.
Shaheen Chohan (10:47):
Mike, I'd like to come back to one statement you made about prior years — all of that major CapEx was concentrated, I think you said, on the Gulf Coast, right? Now you're saying that some of these really quite big mega projects are across the US — so it's no longer a concentrated demand profile. It's pretty much east to west, north to south of the US. Is that creating a new set of challenges when it comes to procuring and sourcing labor?
Michael Bergen (11:20):
Yeah, absolutely. Because you had a concentration of labor that was sitting down here in the Gulf Coast region. And what we identify in our supply and demand dynamics is the travelers making up the shortfall that are out there. And in the years that I've been doing this, I haven't seen something build up so rapidly and at such a high level as the build-out of data centers — that AI infrastructure that's being proposed and built out. We witnessed about $50 billion being executed last year. We're expecting probably about a $78 billion data center build-out this year. And we do see that continuing on through — which is, you know, this uncertainty that's in the market right now — but that is scattered across the country. It really originated from up in Virginia, Texas, Arizona, all over the south. Now we're starting to see data centers pop up trying to find homes in areas where they can embrace power, because power is a big component of that, but also just the land and the support for the data center. And they're looking everywhere.
Shaheen Chohan (12:35):
No disrespect to anybody who constructs data centers — if you look at the physical aspect of the infrastructure to the untrained eye, they seem fairly simple builds, right, compared to let's say a mega ethylene plant, which is clearly a highly complex piece of infrastructure that clearly required a very wide palette of craft labor types. Are you, Chris, seeing some specific pinch points — real supply issues — when it comes to specific crafts?
Chris Smith (13:03):
They require a lot of electricians for those. And so, as Mike was saying about drawing travelers out, some of those travelers going to these other projects — you've got to remember you're taking that person away from the local area that they live in, and now you're creating a deficit there. As you were saying, there's a lot of work in the Gulf Coast. Now, the areas where these data centers are — a lot of those folks had moved to the Gulf Coast to work. Now some of them are going back, but when they're doing that you are taking those electricians, carpenters, scaffold builders, some of your soft trades that are going up there to do tilt-wall buildings on a lot of that. So you use a lot of those trades — your civil crafts — and they're drawing those away from the Gulf Coast and from other areas because they're really paying good wages. They've got to draw them there, and they've almost got an open checkbook to say we're going to pay what we need to, because they've really invested a lot of money in building those data centers. And so they are really sucking those trades off of other areas.
Shaheen Chohan (14:07):
And that's an important point to make — the mechanical trades are still very big in this, because you have a lot of infrastructure needed for mechanical, which relates to all the power generation backup units they have to put in, but also the cooling systems, HVAC and so forth. And so that complex, while it looks commercial, has a lot of industrial features to it.
On top of that, you have big money being thrown out there — Meta, Google, Amazon — and they're willing to pay longer per diems and higher wages. And we know that folks in the construction industry, tradesmen, like to move where the money is. They can be attracted by simply a dollar more an hour. So what has this supply-demand imbalance done to wages?
Chris Smith (15:07):
Definitely it causes them to increase. So when you're competing with those types of wages, you're again trying to draw workers to your refining, to your petrochemical — and you're just like LNG, which pays really well. So we were talking to a client yesterday and they're like, we really struggling. We can't pay per diem seven days. We can't pay three more dollars an hour, because these data centers are drawing from us, and the LNG projects are drawing from us. And so all that does — on top of this shortage, on top of the lack of skill — is cause wages to go up, because these skilled craftsmen can demand what they want. They're basically writing their own check. It just drives wages up. And so companies are trying to control that by using per diem on seven days, as Mike was talking about, but also bonuses, job completion incentives, safety incentives, things of that nature.
Shaheen Chohan (16:07):
Which is all cost. Going back to it — wage inflation is the byproduct of the supply-demand imbalance. But the question I do have is: project owners are willing to spend, so they're going to have to spend to attract the right talent. It's a very competitive market. Do we actually see projects slip, get postponed — schedules having to be adjusted simply off the back of a lack of supply of the right labor?
Chris Smith (16:38):
Yeah, absolutely. And some of those direct impacts, just as you say, are delays. The other thing is productivity — how is the productivity? You've got less skilled guys going in there, you're hiring a bunch of people, but among all those people you may have one good skilled person who has to deal with four or five other unskilled or lesser-skilled people, which takes his time away from doing the buying, the productivity, and maybe leads to rework. Safety issues — we've seen in the news recently a pretty serious incident on a project due to the lack of skill.
Shaheen Chohan (17:21):
The data, the analysis, and the insights that you provide — this is useful content for, I guess, EPCs as well as project owners. Are they pretty much the two target end users, and do they use it in a slightly different way?
Chris Smith (17:32):
They do, they do. There are different ways to employ this information. A lot of times plant owners are using it to look at their projects and plan them — when are we seeing the peaks of demand, do I need to move my project out, do I need to move it forward? The other way they're using our information is to look at wages — when they're looking at their contracts, are we getting charged too much, or are we coming in with a bid that's too high, or is the bid not enough? If the bid is not enough and they're not paying their people enough, they're not going to be able to staff it. And then on these longer-term projects, it's about what are we forecasting — so we're forecasting these wages out five years. You can take a look at our forecast and say, okay, if I'm paying X dollars now, three years from now when we're at peak with our project, are we going to be in the right place with what we're paying now? Do we build in wage increases? What do we need to do to maintain and retain these folks?
And then on the other side with the contractors, it is going in there and saying, hey, we've got to pay this much — there's a deficit, this is why we're at where we are. And that makes for a good conversation between the owners and the contractors. And most importantly, we are a third-party resource — another data point for them to look at, because we survey a lot of contractors to gather wages every quarter, and we can present that to the owner and the contractor. They can see this independent wage survey and say, look, this is what the market's saying. It's not what the contractor is dictating or the owner wants to pay — it's what the market is dictating. And so that creates a better atmosphere for them to develop a strategy moving forward on retaining people on the job site and getting the project done on time.
Shaheen Chohan (19:33):
I know we go very deep into the US and the Canadian market — our service covers Canada as well, labor supply and wages in Canada. Any other geographies do we serve clients in?
Chris Smith (19:44):
Yeah, so we can provide labor demand information on a global scale.
Michael Bergen (19:57):
Yeah. I think it's important to come back to the question about where we stand right now. Because while we're talking about the constraints in the labor market and thinking about whether the economy is actually going to relieve some of that — what we've heard from Chris is that there is a shortfall and we haven't been very good at actually trying to build back up that inventory of workers and getting enough people on the ground doing it.
When we look at where we're at today, we started the year with a record number of projects in the pipeline. And we anticipated that because when we go back to the last two presidential elections, we saw the uncertainty build up in those election years — projects were stalled, they got pushed into the next year. We went to a record $900-plus billion worth of project start construction in the US this year. There was a little bit of stalling because of uncertainty around the election — so some of that spending got pushed into this year. We kind of got a little bit of a sugar rush from the new administration. But now we've got this next wave of uncertainty, which is slowing things down again.
And so when you look at IIR's Project Spending Index — which basically measures the pipeline of projects out there — we're up through the first quarter 16% over last year, showing the health of the industry and the sentiment of owners and their project activity. But if you look at the construction starts data — actual projects that made it through FID and are in the field in construction — the first quarter was down like 30%. And so that is the ramification of the tariff discussion, even before we got to April 2nd. And so when you mix those two together and try to read what's going on, you have owners sitting there waiting for the tariff policies to be settled to see which direction they're going to take their projects. But no decisions have been made to really cancel projects or put them on hold in an impactful way that we would say there's a slowdown in this industrial economy.
Shaheen Chohan (22:10):
Which is good news, because ultimately what that is demonstrating is that the demand for that physical project — the rationale for that project — has not dissipated at all. It's really just about timing now. And this may be a 90-day duration where we just may see people sort of sit on their hands until we start to see some of these bilateral agreements between the US and some of these trade partners come through.
Michael Bergen (22:38):
It is definitely a cost scenario — because if you're bringing equipment over from overseas, you're going to be paying higher tariffs, and it could be different three months from now. And so I think that is one of the reasons why we are seeing projects just get pushed out a little bit in time, but not to the next year.
So right now we've still got $845 billion sitting in the pipeline for this year to start construction. When we look at what is driving spending this year from a mega-project perspective, data centers are like the core of this thing. And then off that you have beneficiaries — power being one of them. Obviously we talked about natural gas power generation, transmission and distribution, but even the semiconductor market. While there's been talk about the IRA repealing and the Chips Act repealing, there's now favorable discussion about how do we restructure the Chips Act — and the Chips Act is still in situ, everything is still in place. That battle has not gone forward. And it may not, because we're entering into midterms, and I don't think we're going to see any repeal passed in Congress before then.
But all in all, there are industries that sit outside this data center market that are in position to continue on growth regardless of what happens in the macroeconomic picture. So macroeconomic picture, industrial economic picture — this is looking pretty sound with some hiccups this first quarter. But I think that we're moving into another era, another bubble being built out with reshoring. Right now we've captured $258 billion worth of projects out of the $2 trillion that's been announced for investments back here in the States — and that's across pharmaceuticals, semiconductors, data centers, power generation, mining projects. And those are reality. You know, GE Aerospace said that they're subject to like $800 million worth of tariffs on their manufacturing site outside of the States, so they announced a $1 billion investment here in the States to manufacture. So we're expected to see more of that coming out.
Shaheen Chohan (25:04):
Chris, so in closing, it looks like a big pipeline, a wave is coming. In terms of that supply-demand imbalance, it doesn't seem like it's going to get fixed anytime soon — going to be a tight market. Would that be fair to say?
Chris Smith (25:19):
Absolutely. As I said earlier, we're not out of the water — it's getting deeper.
Shaheen Chohan (25:26):
Okay. Well, gentlemen, I think that brings us to the conclusion of the podcast. A big thanks to both of you for sharing your insights and your perspectives — really valuable stuff. For those who've tuned in today, if any of you have any specific questions about any of the topics that you heard from Mike or Chris, then please do reach out directly to us. And of course, a very big thank you to Kodiak, our sponsor today — please do take some time to take a look at their website and see what these guys do, and do reach out to them. And finally, thank you for joining us. I hope we have helped you better navigate some of the currents of change that we're seeing currently. Thank you everybody.
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*This episode is brought to you by Industrial Info's Latin American Office in Argentina.