Author: mmcrebuildstg

The following is an excellent summary of what 2022 will bring to our industry, as written by Anirban Basu, Chief Economist for Associated Builders and Contractors, in December 2021.

“After the dramatic pace of economic recovery that characterized 2020’s final eight months and the early months of 2021, economic growth is set to soften in 2022. While recession appears unlikely in the near-term, there are many factors suggesting that the year to come will not produce a further boom in activity.

“Among these factors are:

1. Less growth in federal spending;
2. Ongoing global supply chain disruptions; and
3. Rampant worker shortages.

“While there may be some alleviation of the challenges produced by the latter two factors, the economy will continue to face substantial headwinds.

“With so much going on, it is simple to forget what really matters. More than anything else, economic activity is driven by flows of capital. That capital could become more expansive in 2022 as monetary policy shifts, producing likely increases in interest rates in the process. With so many economic actors so fully leveraged, even small increases in interest rates can produce substantial drag on the economy. A sudden surge in borrowing costs could be enough to throw the 2022 economy into reverse, though such a surge appears unlikely. Still, contractors and other construction industry stakeholders should be eyeing interest rates closely over the year(s) to come.”

Miles-McClellan is experiencing all three factors listed above. However, our backlog remains very strong. There continue to be more opportunities available than we can pursue because of our internal bottleneck of lacking team availability.

While it is challenging, we will continue to focus on our client’s needs and work hard to NOT over-promise and under-deliver!

Basu, A. (2021, December 1). 2022 Construction Economic Forecast – The Recovery Could Have Been So Much Better. Retrieved from constructionexec.com : https://constructionexec.com/article/2022-construction-economic-forecast

It’s always interesting to watch the trends of construction’s big four leading economic indicators while comparing those results to our conversations with our designer and contractor peers. Overwhelmingly, the discussions focus on inflation – both in material and labor inputs. Yet, the amount of work in the system continues to expand.

• The AIA Billing Index rose nominally from 55.6 to 56.6, indicating that architects billed more in September than in August 2021. More importantly, backlogs of architects across the country reached a new all-time high since the AIA started collecting the data quarterly in late 2010, now averaging 6.6 months.
• One additional note worth mentioning from the AIA September survey is that the Project Inquiries Index jumped above 60 to 62.0, which tells us there are plenty of opportunities in the market to pursue.
• 17 new projects, each $100 million and greater, entered the Dodge tracking system.
• The Dodge Momentum Index jumped from 148.0 in August to 164.9 in September 2021. This is the single strongest predictor of our market over the upcoming 12 months.
• While the ABC Backlog Indicator fell nominally from 7.7 to 7.6 months, Miles-McClellan’s backlog, as well as those backlogs of our contemporaries here in Ohio and North Carolina, all remain strong.

All the signs outlined suggest that owners and developers are looking past the current pricing concerns, the continued spread of COVID-19 variants, and the political climate are moving forward with projects to meet demand.

As 2021 second-quarter numbers get reported, all the news feeds are full of inflation talk – is it a transitory or dangerous trend? As we release our Q2 Economic Indicator Report, the Producer Price Index (PPI) numbers were also released, and they are “hotter” than expected. For reference, the PPI index measures price changes from the purchaser’s perspective.

About PPI:

• The PPI is different from the CPI (Consumer Price Index) in that it measures costs from the viewpoint of industries that make the products, whereas the CPI measures prices from the perspective of consumers.
• The BLS (Bureau of Labor Statistics) separates PPI data into three main areas of classification: industry, commodity, and commodity-based final and intermediate demand (FD-ID).
• The PPI is considered an objective tool for adjusting prices in long-term purchasing agreements.

(Majaski, 2021)

The Producer Price Index for final demand rose 1% in July as reported by the Bureau of Labor Statistics. On an adjusted basis, the final demand index moved up 7.8% for the 12 months ended July 2021. This is the largest advance since 12-month data were first calculated in November 2010.

Nearly three-fourths of the July increase in the final demand index can be traced to a 1.1% advance in prices for final demand services. The index for final demand goods rose .6%.

This makes sense – as I poll our project teams, the single consistent theme is the cost and lack of labor.

Interpreting the Trends

• The Architect’s Billing Index remained elevated at a score of 57.1. The regional ABI reported for the Midwest was at 62, an incredibly high number. As a reminder, any score above 50 indicates an increase in architect’s billings and is highly correlated with the number of market opportunities we see in the 8-12 month range. These reports continue to signify a hot construction market in 2022.
• The Dodge Momentum Index indicator, as reported last quarter, had a record-breaking jump from 139.1 in January to 148.8 in March (the most significant single jump in the index’s history), increasing again to 151.4 in April. This trend continued with the index moving to 163.2 in April, 175.1 in May, and 165.8 in June. This continues to signal an ever-increasing number of total projects entering the planning process and an increasing number of large projects in the pipeline. This index tells me that we will have plenty of opportunities available during spring-summer bidding 2022.
• The last indicator that I want to emphasize is the ABC Backlog Indicator, which has now moved above 8 months. This is not surprising given its lagging nature, and you should expect to see this measurement continue to follow the rise in both the AIA Billing Index and the Dodge Momentum Index as we move through fall 2021.

In summary, we are experiencing “hotter” price increases (inflation) than initially anticipated as the economy first started to recover. Labor costs are notably higher, and the market for skilled trades continues to be THE hurdle for the construction industry. While the temporary shortage of some building materials can be managed, the continued tightening of the labor market will continue to affect the schedule. The construction market is continuing to experience increases in construction costs across all types of construction. The lead indicators point toward more of the same as we move through the back half of 2021 and into 2022.

Advanced planning is the single best way to control your budget – so if you have a project in your future – work closely with your architect and construction partners now and start the planning process a little earlier than you typically would to save money.

References
Majaski, C. (2021, July 26). Producer Price Index (PPI). Retrieved from investopedia.com: https://www.investopedia.com/terms/p/ppi.asp