To tackle a +6.8% year-over-year consumer price index (CPI) inflation rate, the Federal Reserve has stated it will be pursuing QT rather than QE in the year ahead—quantitative tightening rather than easing—and that there may be as many as three upward adjustments to interest rates. On the residential construction side, the expectation of higher interest rates may counterintuitively speed up groundbreakings for a while as prospective new homeowners try to beat the financing cost increases.
As the economy improves, unique drivers create different demands in construction
Engineering construction has been solid and flat during the pandemic to date. It’s about to receive quite a boost, however, from the recently enacted infrastructure spending bill.
Six and a half years of normal annual spending on mostly hard infrastructure (roads, sewers and transit) is about to be compressed into the next five years. Plus, there are numerous major projects in the works that are mostly new to the construction scene, including carbon capture and storage facilities, utility-sized battery storage stations and hydrogen extraction plants.
Given climate change and the devastation being caused by wildfires and violent weather, the new buzzword being applied to civil projects underway and planned is that they must be resilient; in other words, capable of being brought back onstream quickly after being knocked out due to an extreme event.
Given climate change and the devastation being caused by wildfires and violent weather, the new buzzword being applied to civil projects underway and planned is that they must be resilient; in other words, capable of being brought back onstream quickly after being knocked out due to an extreme event.
Never mind inflation, conducting business is simply growing more expensive, given demands to convert to green production processes and the need to adopt the latest technological advances to stay competitive. Funds are being diverted from expansions for other purposes. But on the positive side for construction, shortages in almost all areas of the economy—computer chips currently being most apparent—will warrant expenditures to up output.
Also serving to skew the statistics on the economy at present is an excess of demand, arising from cash accumulated while nearly everyone was staying indoors in the early stages of the coronavirus infection. Retail sales, for example, are way above where they would be based on an extension of their pre-virus trend line. There’s a lot of stimulus money to be released on the private spending side (e.g., on goods, services, travel, etc.) once the health crisis recedes, and this will promote a significant improvement in nonresidential building construction.
Residential
A decade of below-trend housing investment is about to be counterbalanced by activity levels above trend. Material input cost hikes will figure more prominently in the dollar volume increases in the years ahead. The duty on Canadian softwood imports has been doubled from 9% to 18%. Inhibiting the advance in capital spending will be the sluggish rate of population growth.
Lodging
In the early Fall 2021, the number of travelers being cleared by the Transportation Security Administration (TSA) recovered to about 80% of pre-COVID levels. Since then, though, the delta and omicron variants have sent infection rates way up again. The negative health issues adversely affecting hotel and motel bookings, and knock-on expansion plans, are likely to linger for years.
Offices
The tug of war between employers wanting workers to return to their offices and those okay with stay-at-home staffing is likely to play out over several more years. Acquiring the funding for new office space construction will be a tough sell. There will, however, be souped-up activity in renovation work (extra entrances and exits to existing buildings, upgraded HVAC systems, etc.)
Retail, Warehouse, Restaurant
Retail construction starts bottomed and began climbing again in 2021. Shoppers will be returning to malls; for many, it’s their best source of entertainment. As for warehouse building, there are more than 50 cities in the U.S. with million-plus populations requiring large distribution centers. Also, deglobalization and a shift away from just-in-time inventory demand more storage space.
Health Care
The Baby Boom generation was born between the mid-1940s and the mid-1960s. Every boomer born and still alive is, therefore, 55 or older. The aging population will be demanding quality health care. More investment in seniors’ homes will also be warranted, but some of it will be driven by design and code changes to rectify patient care shortcomings exposed by COVID-19.
Educational
Births in the U.S. are way down. Immigrant families with young children are also less common. The feeder stream into K-12 schooling isn’t what it once was. In higher education, fewer foreign students and online courses have lowered lecture hall attendance. Help has come from joint academic-business research ventures. Plus, there’s a trend to build teaching hospitals on campus.
Amusement and Recreational
The unemployment rate has tightened, and wages have been climbing at double their usual pace. The national savings rate shot into the stratosphere in Q2 2020 and has stayed somewhat elevated. Cash is on hand to splurge on recreation when everyone is totally confident about mingling. Professional sports teams in several major cities are planning new arenas or stadiums.
Transportation
Before the health setback in Spring 2020, nearly every big city had new or additional rapid transit lines in the forefront of their capital spending plans. Then commuter patterns were knocked for a loop by the work-from-home upsurge. Those initiatives will be coming back on stream, but more gradually than first scheduled. The same applies for major expansions at international airports.
Finally, there’s also good news emanating from the amusement category of construction. There are seven soccer stadiums in various stages of advancement across America. In 2022, pro soccer will be widening its city presence from 26 teams to 30.
Alex Carrick is chief economist for Cincinnati-based ConstructConnect. He is an awarded author of thousands of articles and is regularly quoted in major news outlets.
The supply shortage is a springboard to massive manufacturing investment. Also, for car companies to realize zero carbon emission goals by the 2030s, there will need to be new battery plants and assembly lines. Finally, the U.S. has a huge natural gas cost advantage versus Europe and Asia, providing a spur to capital spending at fertilizer, LNG and petrochemical plants.
Alex Carrick is chief economist for Cincinnati-based ConstructConnect. He is an awarded author of thousands of articles and is regularly quoted in major news outlets.
