WHAT HAPPENED TO THE ECONOMIC RECOVERY?

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Supply Chain Challenges & Inflation

Canada recently achieved a milestone that remains elusive in America.  After losing nearly 3 million jobs in March and April 2020, Canada had clawed back all of those jobs by September 2021, when employment totaled 19.1 million, slightly above the pre-pandemic peak.  By contrast, employment in America stood 5 million below its pre-pandemic tally through September 2021.

Indeed, the U.S. economy has run into some sizeable roadblocks. Economic growth slowed dramatically during Q3:2021 while inflation ramped higher.  Between September 2020 and September 2021, the economy’s aggregate price level rose 5.4 percent based on the Consumer Price Index.  Job growth has slowed in recent months, with the nation adding just 194,000 jobs in September according to an initial estimate from the Bureau of Labor Statistics after a disappointing August. 

This has not occurred because of a lack of demand for workers.  Quite the opposite, demand for workers remains at record levels.  A recent data release from the Bureau of Labor Statistics indicates that the number of available, unfilled jobs in America easily exceeds 10 million.  Construction is associated with several hundred thousand available, unfilled jobs.  The challenge has been to get people back into the workforce.  Theories abound regarding the lack of interest in work, including fears of infection, vaccine mandates, lack of affordable daycare, prior stimulus and unemployment insurance payments, and an aggressive cultural shift toward work-life balance.  As of September 2021, America’s labor force was 3.1 million people smaller than prior to the pandemic’s onset.

Few economic actors understand inflation as well as America’s contractors.  During a recent 12-month period, the Producer Price Index for construction inputs rose approximately 19 percent, with some categories like steel mill products and natural gas more than doubling. Ostensibly, demand for construction services should be overwhelming in the U.S.  Liquidity injections fueled by the Federal Reserve have supported ultra-low interest rates even in the context of elevated inflation.  That allows \investors to borrow cheaply.  Many are looking for ways to deploy capital, including investing in real estate.  But the high cost of delivering construction services has caused some project owners to delay project start dates.  On occasion, projects have been cancelled because they no longer work financially, resulting in declining backlog in certain segments.

These dynamics may help explain some of Canada’s recent experience.  While the broader economy has recovered nicely, that nation’s construction industry actually lost jobs in September. Construction employment declined by nearly 11,000 that month.  Construction spending was also down (0.7%), thought it was up 12.1 percent on a year-ago basis. 

Total construction spending in the U.S. remained virtually unchanged in August. Year-over-year spending is up 8.9 percent.  A 0.4 percent increase in residential spending was offset by a matching 0.4 percent decrease in nonresidential spending, with the latter segment continuing a downward trend.  Between February 2020 and August 2021, total nonresidential construction spending in America was down nearly 11 percent.

Conventional wisdom suggests that matters should improve in 2022.  Global supply chains should become more orderly, input and other prices should rise less rapidly, and input shortages should dissipate.  A U.S. infrastructure package could also help create additional construction industry momentum heading into 2023.

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