The Construction Outlook

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The Construction Outlook

Rich Higgins, CPA

So many economists are weighing in with their predictions for the construction industry,and rightfully so. What happens in the construction industry is often the prelude to what will happen to the rest of the economy. According to Oxford Economics, a leader in global forecasting and quantitative analysis, the construction market will rise by3.5% by the end of 2023.

Oxford Economics’ baseline forecast calls for 7.3% Gross Domestic Product (GDP) growth in 2022. Its forecasts are based on Biden’s infrastructure plan becoming law. According to the updated White House Fact Sheet on the American Jobs Plan (AJP), $2 trillion is earmarked to be spent on America’s infrastructure over the next decade. Even so, a lot of things could happen. AJP might not become law in its current form. If vaccines have limited effectiveness against COVID variants, Oxford Economics projects that growth maybe just under 3%. If inflation persists, growth might be just under 6%. But if everything goes right and the “consumer boom” ensues, growth could jump to nearly 10%.

Economists at Morgan Stanley say that the second-half growth slowdown will occur in the third quarter. Gross domestic product growth in the July-September period is projected to be 2.9%, down sharply from the previous figure of 6.5%. Even so, Morgan Stanley maintains its fourth quarter growth projection of 6.7%.

The bottom line is that we are in a very fluid situation. We must look at many other scenarios based on current fact and future possibilities before deciding on the direction to take. What happens in one period may be very different from what will happen in the next. It is therefore important to keep up with the economic data from numerous trusted sources.

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Overall U.S. Labor and Wages The U.S. Bureau of Labor Statistics reported on September 3, 2021, that the economy added 235,000 positions in August. Economists surveyed by Dow Jones had hoped for 720,000 new hires. Even so, the unemployment rate dropped to 5.2% from 5.4%, in line with estimates.

Overall wages continued to accelerate in August, rising 4.3% on a year-over-year basis and 0.6% on a monthly basis. Estimates had been for 4% and 0.3% respectively.

Construction Labor Statistics The construction industry lost 3,000 jobs on net in August, according to an Associated Builders and Contractors (ABC) analysis of data from the U.S. Bureau of Labor Statistics. Despite the monthly setback, the industry has recovered 881,000 (79.2%) of the jobs lost during earlier stages of the pandemic.

ABC reported that nonresidential construction employment declined by 20,300 positions on net. Nonresidential specialty trade contractors lost 9,200 jobs, heavy and civil engineering lost 8,300 and nonresidential building employment dipped by 2,800 positions.

The construction unemployment rate fell sharply to 4.6% in August. Unemployment across all industry sectors declined from 5.4% in July to 5.2% last month.“Many observers will simply attribute the extraordinarily disappointing employment report to the malicious impacts of the Delta variant,” said ABC Chief Economist Anirban Basu. “While the ongoing pandemic clearly had an impact on employment in segments such as retail, lodging, and restaurants in August by suppressing demand for additional workers, construction employment dynamics were more affected by ongoing supply-side bottlenecks.

“Collectively, nonresidential contractors exhibited significant confidence in the past few months,” said Basu. “In general, positive expectations have gone unmet, at least thus far. Industry participants had anticipated rising employment during the back half of 2021, according to ABC’s Construction Confidence Index, but nonresidential employment declined by more than 20,000 positions in August. Anecdotal evidence suggests that many projects have been put on hold. This is due to lofty construction costs, which is the result of global supply chains in disarray and growing difficulty hiring skilled construction workers.

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“What is truly unnerving is that despite the loss of industry jobs in August, the construction unemployment rate actually declined from 6.1% in July to 4.6% last month,” said Basu. “The implication is that the construction workforce is not expanding. This opens up the possibility that labor costs could continue to rise rapidly even if industry momentum softens. Furthermore, with the Delta variant causing additional supply chain disruptions in Asia and elsewhere, materials prices may not decline as rapidly as had been hoped. This potentially sets the stage for waning industry momentum as 2022 approaches. The good news is that weak employment numbers will likely help keep interest rates lower for a lengthier period.”

Construction Backlog Indicator ABC reported on September 14 that its Construction Backlog Indicator fell sharply to 7.7 months in August, according to an ABC member survey conducted August19 to September1. The reading is down 0.8 months from July 2021 and down 0.3 months from August 2020.

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Construction Confidence Index on Sales, Profit Margins, and Staffing ABC’s Construction Confidence Index readings for sales, profit margins and staffing levels all fell modestly in August but remain above the threshold of 50, indicating expectations of growth over the next six months.

“Both contractor backlog and confidence have begun to fade,” said Basu. “Higher materials prices and labor costs have conspired to put more projects on hold. In many instances, expanding costs have rendered projects infeasible.

“That said, it is still the case that contractors collectively anticipate sales, staffing levels and margins to rise over the next six months,” said Basu. “Theexpected pace of improvement has softened, however. With so much liquidity continuing to be injected into financial systems, investors have considerable sums to deploy in new investments. Real estate valuations and construction volumes benefit from such dynamics. Recent dips in commodity prices and more normal labor market functioning should help translate into slower cost escalations and rebounding backlog during the months ahead, ultimately reversing the backlog decline sustained in August.”

“There is at least one other factor that has helped to stimulate contractor confidence,” said Basu. “A number of survey respondents indicated that they are observing less competition for projects. Many firms appear to have reached their capacity limits, and therefore are not able to bid on significant numbers of projects. At the individual firm level, the lack of substantial competition is consistent with stable or rising backlog. At the industry level, it is consistent with a lack of nonresidential construction spending growth as supply constraints make their mark. With firms racing to bolster delivery capacity, wages are predictably rising as contractors compete vigorously for talent. More than 75% of respondents expect to raise wages over the next six months.”

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Construction Input Prices Construction input prices declined 0.6% in August compared to the previous month, according to an ABC’s analysis of U.S. Bureau of Labor Statistics’ Producer Price Index data released on September 10. Nonresidential construction input prices fell 0.4% for the month.

ABC reported that despite the monthly decline, construction input prices are still 20.8% higher relative to a year ago. Nonresidential construction input prices expanded 21.6% during that period. The price of natural gas has experienced the largest year-over-year increase, rising 132.2%, followed by the aggregate price of steel mill products, which increased 123.1%. Iron and steel prices have nearly doubled over the past year, increasing 95.2%. The prices of unprocessedenergy materials and crude petroleum were also up, rising 79.2% and 74.8%, respectively.

“Though the headline number characterizing the direction of construction input prices appears favorable, many materials prices rose last month,” said Basu. “The overall decline in materials prices, which was small, was driven by two categories in which prices declined significantly: softwood lumber (-27%) and crude petroleum (-10%). But those were exceptions. Among the categories registering monthly price increases of3% or more were prepared asphalt, steel mill products, natural gas,and fabricated structural metal products.”

“Some of the recent setbacks in global supply chain recovery relate to the dislocating impacts of the Delta variant, but there are other forcesat work, including government policy and geopolitics,” said Basu. “As a growing number of nations around the world increase vaccination rates, the global economic recovery should continue. That will put even more upward pressure on input prices, all things remaining equal. Passage of a meaningful American infrastructure plan would further catalyze price increases.”

“Hopefully, currently elevated prices will induce suppliers to increase output in the short term and capacity over the longer term,” said Basu. “While supply chain disruptions, input shortages and high prices, which many contractors mentioned as factors affecting their backlog—according to ABC’s Construction Backlog Indicator—are likely to persist into 2022, the laws of economics suggest that project owners and the contractors who work on their behalf will benefit from some price relief at some point next year.”

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About the Author Richard P. Higgins, CPA is the managing partner –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. Rich helps contractors to 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: Oxford Economics, Association of Equipment Manufacturers (AEM), Morgan Stanley, Associated Builders and Contractors (ABC).

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).

Rich Higgins, CPA