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The Construction Forecast for 2022 Looks Promising
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Richard P. Higgins, CPA
The overall forecast for the construction industry looks promising even though inflation is high, the supply chain is tight, and labor and material costs are rising. The pandemic continues to disrupt operations across all industries as another coronavirus variant comes into play.
While most sectors of the construction industry were hit hard during the pandemic, residential grew due to the high demand for housing. Home prices were inflated in 2021 to a level that has not been seen before. Even though “the construction outlook for 2022 is looking positive, the industry will face challenges,” said Anirban Basu, chief economist for Associated Builders and Contractors (ABC) and CEO of consulting firm Sage Policy Group. Basu shared his economic forecast for the industry during a webinar for ABC’s Construction Executive magazine on December 8.
“I think that 2022 is going to be a very busy for construction," added Basu. "Think very long and hard before you enter into contractual obligations. Make sure you build enough margin and contingency."
“Skyrocketing home prices may also have a positive impact on the construction industry,” Basu explained. “Local governments drive much of their revenue from property taxes, and home reassessments will mean more tax base for many communities, ensuring those governments still have money available for construction projects. Plus, much of the money for government construction included in the American Rescue Plan has yet to be spent.”
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“So state and local government spending, even without the infrastructure package, would have been a driver of construction activity,” Basu continued. “But now infrastructure factors on top of
those monies, so you should see a lot of state and local spending on construction going forward, including school construction, which stands to be one of the big winners.”
The inflation rate in the U.S. increased to 6.8% in November of 2021, the highest since June of 1982. It marks the ninth consecutive month inflation was above the Federal Reserve’s 2% target. Basu expects inflation will remain high in 2022 even if the Federal Reserve attempts to limit the inflation rate to 3-4% next year, with a drop coming later in the year.
The prices of construction materials have risen rapidly over the past year. As of October, the 12month producer price index for steel mill products was up 141.6%, according to the U.S. Bureau of Labor Statistics. “A lowering inflation rate, along with expected rising interest rate and the recovery of manufacturing and supplychains, could help lower the prices of materials like steel, copper, and aluminum,” said Basu.
“With so many public projects coming in the next year, it may be the time to pursue mergers and acquisitions. I think, to be successful, it’s going to help to be bigger,” Basu explained. “Significant technologies are more expensive, as well as recruiting and training costs. It’s nice to have a larger line of credit and more bonding capacity to go after some of these large-scale projects that are coming down the pipe, whether in infrastructure, or other segments.”
Dodge Data & Analytics anticipates modest growth of 6% in the construction industry for the next year, despite challenges with labor, supply chains and productivity. "We expect total starts to be above 2019 levels in 2022, mainly due to the residential sector," said Richard Branch, chief economist for Dodge during their quarterly economic forecast event in November. "Quarterly growth rates will be slow over the course of the next year, however. It represents an economy that is getting off a sugar high and getting into a more sustainable growth pattern."
"We will see a 32% increase in construction starts over the next five years if the Infrastructure Investment & Jobs Act (IIJA) is passed,” Branch said. “If the bill is not passed, the growth rate falls almost in half to 14.9% over five years, which is very weak. IIJA would inject $550 billion in new spending for roads, bridges, and other hard infrastructure over a five-year period. While the impact of thisfunding will be felt immediately, an even stronger influence will be felt from 2023-2025 as the funding trickles through to larger projects.”
"We anticipate states will want to tick those larger projects off their list first with these dollars," Branch says. "We assume 80% of these dollars will be spent by 2026."
"Project starts normally take about three months to get off the ground," Branch said. "Right now, the lag for projects to start is about eight months. Starts will grow in 2022 but it’s going to be modest because projects are taking longer to start, and this lag is due to higher prices and fewer people. Prices and shortages will persist beyond 2021, leading to longer lead times from planning to groundbreaking and your company needs to be prepared."
It will be interesting to see what happens in 2022. Both economists cited in this article anticipate growth in the construction industry. Even so, many variables will impact if the industry expands or contracts next year.
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About the Author Richard P. Higgins, CPA is the managing partner in the New Jersey office of McCarthy & Company. Contractors trust Rich to assist them with a strategy to achieve their goals by looking at key indicators such as productivity, job costing, profit margins and cash flow. Richalsohelps contractors establish realistic benchmarks to assess how well they are doing or to alert them to issues that need to be addressed. He can be contacted at 732.341.3893 or Richard.Higgins@McCarthy.CPA.
Sources: 1. Economist Projects 'Very Busy' 2022 for Construction Industry. James Leggate. ENR. December 9, 2021. 2. Bright and Busy Future Ahead for the Construction Industry. Jessica Leggate. For Construction Pros.com. November 3, 2021.
Rich Higgins, CPA
Disclaimer: This article is for informational purposes only and does not constitute professional advice. We strongly advise you to seek professional assistance with respect to your specific issue(s).
