The following content was originally published February 2023 on IBM’s Category Insights Newsletter.
As we “slam-the-lid” on another year and bid a “not-so-fond” good riddance to 2022, the outlook for construction in 2023 seems bleak, but with some high spots.
Inflation
While inflation volatility across the globe has settled (not much change from the previously period), rates remain high, causing investors and consumers to reduce spending.
Argentina and Turkey remain highly volatile, but the rest of the world seems to have settled with very little volatility throughout. Rates in the US remain above 7% while the UK sits at nearly 11%. Germany dropped 1.4 points to 8.6% while declines in Spain, India, and Brazil have them hovering around 6%.
Figure 1 https://tradingeconomics.com/country-list/inflation-rate
All of this inflationary pressure is impacting construction.
Real Estate Activity
The Beige Book Summary of Current Economic Conditions published by the US Federal Reserve shows flat labor demands across the US together with “moderate or strong” rises in consumer prices. All districts reported declines in real estate activity while some report the start of lay-offs due in part from inflationary pressures.
The American Institute of Architects Billings Index for November shows a decline in Architectural billings. This is the first time in 2 years that the billings index has been below 50 (any score below 50 indicates a decline in firm billings). Along with a reduction in billings, architects are reporting a reduction in new project inquiries as well. Signaling a decline in future growth.
Figure 2 https://www.aia.org/pages/6576981-abi-november-2022-architecture-firm-billin
Global Housing Starts
Further reinforcing concerns of a decline is the slow-down in construction starts globally.
Figure 3 https://tradingeconomics.com/country-list/housing-starts
Wide swings in activity resulting in an average decline of 6% globally, signals lower demand and lower confidence in the market. Russia is showing the effects of the war on Ukraine at a 61% reduction from July to November, while the Czech Republic, Israel, Japan, Norway, Sweden, Thailand, and the UK all show double digit declines. The US recovered from it’s 11% drop on the last quarter but was flat at 0% this quarter.
Commodity Prices
The high point as we close the year is the stability in commodity pricing. All of the major commodities we track; lumber, copper, steel, and aluminum remained relatively flat compared to last quarter. The volatility we saw in the previous year has completely settled and pricing is mostly back to pre-pandemic levels.
Figure 4 https://www.nasdaq.com/market-activity/commodities/lbs
Lumber prices are well below pre-pandemic levels. From a historic high of $1,481 in May 2021 and it’s 2019 high of $401, lumber is sitting at $394.8.
Figure 5 https://www.macrotrends.net/1476/copper-prices-historical-chart-data
Copper is down from it’s Feb 2022 high of $4.94 to $3.92. This is not quite to pre-pandemic values (below $3.00), but still reasonable.
Figure 6 https://tradingeconomics.com/commodity/steel
Steel has come down from it’s October 2021 high of $5,969 to $4,052, well below the pre-pandemic 2018 high of $4995.
Figure 7 https://tradingeconomics.com/commodity/aluminum
From it’s high of $3,932 in May 2022 aluminum is down to $2,295. Pre-pandemic the high for aluminum was $2,545 in April 2018.
Labor
Raw material pricing is in a good place, but construction costs overall will be dramatically influenced by labor and supply chain issues.
The American General Contractors (AGC) Association continues to sound the alarm on labor. In a survey published in their 2023 Construction Hiring and Business Outlook Report, 69% of firms are expecting to increase headcount and 58% of them expect hiring to become more difficult.
In our Q2 insights edition, we looked at the population pyramids for the US and other western nations, noting that a lack of younger workers will continue to cause labor shortages. Immigration reform is one avenue for addressing these concerns but as the AGC noted, “Washington’s failure to pass immigration reform, combined with a significant funding gap between collegiate education and career and technical education tracks, means there are very few new workers entering the construction labor pool domestically or from other countries”.
Supply Chain
Further impacting the industry are persistent supply chain issues.
In our 3rd quarter insights, we reported “Supply chain constraints in roofing, architectural interiors, and wood products continue”. Some of these supply constraints have started to stabilize. Unfortunately, constraints on other products remains high.
According to the Fall Construction Market Trends Report from Skanska, lead times for; high purity piping (used in life sciences, pharmaceutical, and semiconductor) are over 24 weeks, HVAC equipment is running at a 70 week lead time, electrical gear is over 80 weeks out, and generators have lead times ranging from 60 to 100 weeks.
All of these constraints are expected to persist through 2023 and are driving costs for these products up with demand.
Closing
So as we end the first quarter of 2023, do you see these trends persisting? Have lead times improved? What about price volatility? Has that settled or are we still on a rollercoaster? Tell me your stories.
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