PANDEMIC LINGERS, GROWTH CONTINUES
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Complete Recovery Remains Elusive
North America’s recent track record in terms of supporting ongoing economic recovery can be summed up in one word – inflation. Not only has inflation been elevated in both America and Canada, but its causes encompass virtually all that frustrates finishing contractors and other economic actors in both nations.
Between November 2020 and November 2021, America’s Consumer Price Index expanded 6.8 percent, the highest rate of inflation sustained since 1982. Canada’s headline rate of inflation rose to 4.7 percent year-over-year in October from 4.4 percent the prior month. That represents the highest rate of inflation in the world’s 10th largest economy since February 2003. The steepest increases in prices emerged in energy costs (+25.5%) and transportation (+10.1%). In the U.S., inflation emerged from many sources, including energy (+33.3%), new vehicles (+11.1%), food (+6.1%), and apparel (+5.0%).
To assess how long this bout of inflation will persist, one needs to understand its root causes. Much attention has been given to lingering supply chain disruptions. Conventional wisdom has been that these disruptions are merely temporary, and that much of the inflation we’ve been experiencing is transitory.
But that perspective is overly simplistic. While it’s true that pandemic-era shutdowns have interfered with production while stimuli intended to countervail the economic impacts of the public health crisis have produced unusually strong demand, there are some permanent inflationary factors at work. At the forefront of these issues is a highly constrained North American workforce. There are simply not enough available workers in the U.S. and Canada to fill available jobs. The latest data from America indicate that there are more than 11 million available unfilled jobs in America.
While that is an indication of economic strength, the challenge lies in the fact that data characterizing October indicates that the U.S. was associated with only 69 available workers per 100 jobs openings. With many North Americans reevaluating what matters to them in the context of dislocations produced by the pandemic and attendant behavioral changes, the quits ratio has been at record highs, further exacerbating training costs, hammering productivity, and driving up wages as employers seek to speed recruitment and bolster retention. In October, 4.2 million Americans quit their jobs. The prior month, the tally was an even more astonishing 4.4 million.
Here is the upshot for finishing contractors. While certain prices are likely to decline next year or at least stop rising so quickly, wage pressures will continue indefinitely. One of the issues is that many Baby Boomers retired earlier than anticipated during early pandemic stages. These were some of our finest construction workers, having entered the skilled trades as young people and remained dedicated to their craft for decades. The loss of that expertise and experience is not only incalculable, but leaves in its wake permanent inflationary pressures.
It will be up to younger people to fill available construction job openings. As of October, there were 410,000 available, unfilled construction jobs in America. In April 2020, when the pandemic was at its most ruinous in terms of economic impact, the number of construction job openings stood at 220,000. Many construction workers were dislocated from their jobs early during the pandemic and it has been challenging to get them back. America has just passed a sizeable infrastructure package, which will put even more pressure on an already overwhelmed workforce.
Along this dimension, Canada has been no different. Despite significant demand for workers, Canada’s construction employment was up only 1.9 percent on a year-ago basis in November. That’s remarkable given that a year ago, there was no vaccination program rolling out in North America. Even with much progress in terms of rendering workers and jobsites safer, it remains challenging for contractors to staff up fully.
Finishing contractors have of course faced other sources of inflation. According to U.S. Producer Price Index data, construction materials prices rose 23.5 percent between November 2020 and November 2021. During that period, steel mill product prices expanded 142 percent while iron/steel prices rose 105 percent. Transporting materials to job sites and providing sites with energy have also become far more expensive, with both crude petroleum and natural gas prices surging during a recent 12-month period. In Canada, nonresidential building input prices rose nearly 3 percent in October alone and were up more than 8 percent on a year-ago basis. Residential building input prices were up more than 20 percent on a year-over-year basis.
Construction Spending Growth Constrained in North America
North America’s recent track record in terms of supporting ongoing economic recovery can be summed up in one word – inflation. Not only has As of October 2021, construction spending in America was up 8.6 percent on a year-over-year basis. Facially, that seems impressive. Here’s the problem: that figure reflects nominal dollars. Spending growth is rather flat once one considers wage and materials price increases. In October, Canadian construction spending actually declined nearly 3 percent. With the omicron variant making its presence felt, there could be additional lockdowns and/or more people reluctant to come to work. The implication is that the unbalanced construction economy will persist. The demand for construction services will remain elevated, while workers, equipment and materials will either be in short supply, very expensive or both.
Optimal Response
From an economic perspective, the principal challenge for contractors in 2022 will be to charge enough to offset ongoing increases in the cost of delivering services. At the same time, bids cannot come in so high that firms become uncompetitive and lose appealing work.
The key therefore is active communications with estimators and salespeople. Salespeople need to understand what project owners are willing to pay for construction services. Estimators need to take various factors into account, including the trajectory of labor, materials and equipment costs and supply error-free estimates. While some finishing contractors may find their profit margins already squeezed by current dynamics, this is arguably a small price to pay for adequate backlog and accompanying peace of mind.
Under some circumstances, salespeople may be tempted to offer construction delivery prices that are too low. After all, these professionals seek to make deals. The problem is that if they are too eager to consummate deals, they can offer prices that ultimately result in excessively low margins or worse.
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