The Economic Rollercoaster Continues for the Construction Industry
The construction industry is in a tricky spot. Despite rising spending in the sector, some of the most critical economic fluctuations in the last few years, including broken supply chains, rising interest rates and labor shortages, have hampered what is usually a resilient industry. Brent Chambers of CapitalPlus Construction Services sets the scene.
BY BRENT CHAMBERS, EXECUTIVE VICE PRESIDENT, CAPITALPLUS CONSTRUCTION SERVICES
The last three years have been a crazy ride for all of us, especially the construction industry. The journey began with the onset of the COVID-19 pandemic in which the national (if not global) response to the virus was to shut everything down that was not considered “essential.” Even if an industry was not totally shut down, those that provided goods and materials drastically reduced their output to keep from stockpiling inventory that may not be used for weeks, months or even longer. These massive shutdowns and cutbacks lead to a recession in 2020, but it was one of the shortest ever recorded. The quick turnaround time was brought about by a strong rebound in consumer demand, which led to an unprecedented imbalance in the supply and demand paradigm. This shockwave later became better known as the supply chain disruption we now face.
Broken Supply Chains and Labor Shortages
The definition of construction is “the act or result of putting different things together,” so it makes sense that the construction industry would be one of the most impacted by disruptions in the supply chain. Although prices for select materials have begun to slowly stabilize or even reduce at home, unfortunately, COVID-19 continues to plague China, which is a large supplier of all kinds of goods in the U.S., including construction materials and equipment. This, compounded with the recent impacts from the war in Ukraine, means disruptions and instability in the supply chain will continue.
Moreover, along with the broken supply chain, huge labor shortages have stunted recovery even further. Construction industry leaders have reported that as many as 400,000 construction jobs remain unfilled with no signs of progress. The shortages started during what is being coined “the Great Resignation” and when this is compounded with the projected retirements from the baby boomer generation, we are left with a workforce that is vulnerable. According to the Pew Research Center, more than 40% of all baby boomers were retired as of September 2020 and the pace of retirement among baby boomers continues to rise. To make things even worse, the younger generations are choosing fewer physical forms of employment, leaving an empty bench for the construction industry.
Spending on the Rise
The news is not all bad, however. The overall construction industry has responded relatively well to the pandemic and spending in construction is on the rise. According to many sources, construction spending was up in 2022 by more than 12% in the first quarter and looks to continue for the near future. Much of the increase is driven by the residential sector (+18%), but the nonresidential building and nonbuilding infrastructure sectors are on the rise as well (7.4% and 3.5%, respectively).
The construction industry is a resilient bunch. Firms have adapted their purchasing programs by turning to technology to innovate and automate their processes. Furthermore, firms have turned to technology to integrate their projects from engineering to preconstruction to project delivery. This innovation has led to increased productivity and higher margins, helping to offset the impact of the COVID-19 hangover.
Unfortunately, the crystal ball is becoming extremely fuzzy for 2023. Inflation is at a 40-year high, and the Federal Reserve has begun to make rate hikes to slow it down, and it seems like more hikes are to come. Unfortunately, since the 1980s, the Federal Reserve has engaged in eight interest rate tightening cycles and six have resulted in recession. Many believe this cycle will be no different. The only real debate here is how bad will it be?
Rate Hikes and Inflation
The impacts of rate hikes and a slowing economy can be staggering to the construction industry. Rate hikes typically increase the cost of construction materials as manufacturers and suppliers are forced to trickle down their financing costs. Moreover, due to the increased cost of money, project starts may begin to slip, lowering the opportunity for projects and forcing firms into bidding wars. This is unfortunate for an industry that continues to suffer from a fractured supply chain. We will keep our fingers crossed for a rapid economic recovery and a return to happier days.
Brent Chambers is executive vice president of CapitalPlus Construction Services.
Established in 1998, CapitalPlus Construction Services is a provider of accounts receivable financing and materials financing for construction companies, general contractors, subcontractors and disaster recovery providers of all sizes and types.