By Ken Simonson, Chief Economist, Associated General Contractors of America
Construction in the United States is expected to increase in 2022 throughout the nation and across most structure types. But contractors will have to run a gauntlet of challenges from labor shortages, volatile materials costs and disrupted supply chains, according to evidence from numerous sources.
Following a year in which homebuilding and apartment construction were red-hot but most nonresidential segments remained frozen, nearly all categories appear poised for growth in 2022. Monthly data from the U.S. Census Bureau on “value put in place”—spending on projects underway—showed strong double-digit percentage growth for the first 11 months of 2021 compared to the January-November 2020 period for residential construction. Outlays for single-family homebuilding soared 34 percent year-to-date, while spending on multifamily buildings climbed 16 percent. Meanwhile, spending on both private nonresidential and public projects trailed the 2020 year-to-date totals by 3 to 4 percent. Those figures represented a substantial improvement over comparisons earlier in the year and suggest a solid basis for an upturn in 2022.
An added reason for optimism comes from two firms that separately collect project information and post monthly releases on the value of project starts. Dodge Construction Network reported that total starts increased 12 percent in 2021 as a whole from 2020. Residential starts rose 20 percent, nonresidential-building starts picked up by 12 percent, and nonbuilding starts inched up 0.4 percent. ConstructConnect listed total starts as climbing 6 percent for the year, with gains of 15 percent for residential buildings and 0.9 percent for heavy-engineering (civil) starts but a modest 2.5-percent decline for nonresidential-building starts. As with the Census numbers, the nonresidential starts comparisons grew more favorable as 2021 progressed. (A cautionary note: Neither these estimates nor the Census Bureau data are adjusted for inflation.)
Three forward-looking indicators also are pointing to expansion in 2022. The American Institute of Architects (AIA) queries a fixed group of several hundred architecture firms each month as to whether their billings were higher or lower than the month before. When more firms say “higher” than “lower,” the AIA’s Architecture Billings Index (ABI) registers above 50. That occurred for each of the last 11 months of 2021, following scores below 50 in March 2020 through January 2021. According to the AIA, consistent readings above 50 signal an increase in nonresidential-building construction 9 to 12 months later—in this case, throughout 2022. In addition, the AIA reported in January that their panel’s backlogs averaged 6.5 months, “near their highest levels since the AIA began tracking this metric in 2010”.
Dodge, meanwhile, combs through its database to identify projects in initial planning stages and produces a “momentum” index that signifies the direction of spending put in place 12 months later. Dodge reported in early January, “Throughout the year, the overall Momentum Index increased 23%, the strongest annual gain since 2005. Both the commercial and institutional components of the Momentum Index saw similar gains—with their levels of activity reaching 13- and 14-year highs, respectively.”
As for residential construction, the Census Bureau reports each month on single- and multifamily-housing starts, building permits and permits that have not yet been turned into starts—a sort of backlog index for potential near-term starts. Single-family homebuilders typically start projects as soon as they get a permit, but multifamily developers may wait until a certain percentage of the units are leased before breaking ground. As of December, the number of these unused permits for projects with five or more units exceeded the December 2020 total by 53 percent, a strong indication that multifamily buildings will keep rising in early 2022.
In addition to these broad indicators, economic forecasters and contractors themselves report widespread optimism about the market. In mid-January, the AIA posted 2022 and 2023 forecasts from eight economists for numerous nonresidential-building segments. The “consensus” of these forecasts is that “the market is expected to see a healthy rebound, with spending increasing by 5.4 percent this year before accelerating to an additional 6.1 percent increase next year….This year, only the hotel, religious, and public safety sectors are expected to continue to decline. By 2023, all the major commercial, industrial, and institutional categories are projected to see at least reasonably healthy gains.” (Again, these predictions are for current-dollar outlays, not adjusted for price changes.)
The leading construction trade association, the Associated General Contractors of America (AGC), asks its members each year if they expect the dollar value of projects available on which to bid to be higher or lower than the year before. The 2022 survey, supported by Sage Construction and Real Estate, drew more than 1,000 responses from contractors that perform every type of construction other than single-family. The AGC subtracts the percentage of negative responses from the percentage of positive replies to produce a net reading. For 2022, the net was positive for all but two of the 17 project types in the survey. That was a huge turnaround from expectations a year earlier when only three categories drew even modestly positive net readings.
Contractors expressed the most widespread optimism about highway and bridge construction, with 63 percent of respondents reporting they expected more work on which to bid compared to just 5 percent who expected less, for a net reading (based on unrounded percentages) of 57 percent. There were also extremely positive net readings for other transportation categories, such as airports, transit, intercity rail and trucking facilities (a net reading of 51 percent) and water and sewer projects (a net of 50 percent).
Most likely, some of the optimism about these segments stems from the enactment last November of the Infrastructure Investment and Jobs Act, which directs an unprecedented $1.2 trillion of federal funds to a wide range of infrastructure categories. The timing for awarding most of that money remains uncertain. But state and local governments, which select and at least partially fund most infrastructure work, have already received large amounts of pandemic-relief funding that they haven’t spent yet, along with a boost to their own tax revenues from rising personal and business incomes, consumer purchases of goods subject to sales taxes, residential-property values and individuals’ capital gains on sales of securities.
Optimism predominates as well for largely private construction categories. There were net positive readings of 41 percent for warehouses and “other” healthcare such as clinics, labs and testing facilities and 38 percent for hospital construction. Contractors were also optimistic about multifamily-residential construction, with a net reading of 32 percent, and manufacturing construction, with a net reading of 27 percent. Expectations were more subdued, however, for public buildings, with a net reading of 20 percent; kindergarten-through-12th-grade-school construction, with a net reading of 19 percent; higher-education facilities, with a 16-percent net reading; and lodging, with a 6-percent net reading. The only two negative net readings, both -8 percent, were for retail and private offices.
Nearly three-quarters of the respondents—74 percent—expected their firms to add to their headcounts in the coming year. However, a similar share—75 percent—predicted it will be as hard or harder than last year to fill positions.
Recent figures from the U.S. Bureau of Labor Statistics (BLS) appear to support both the optimism about adding workers and the worry about difficulties in doing so. After stalling for a year, employment at nonresidential firms increased in the final four months of 2021 at a faster rate than either residential-construction employment or total nonfarm-payroll employment. From August to December 2021, nonresidential firms—building contractors, specialty-trade contractors and heavy- and civil-engineering construction firms—added almost 130,000 employees, a gain of 2.9 percent. In contrast, employment at residential builders and specialty-trade contractors edged up just 0.3 percent, while total nonfarm-payroll employment grew 1.8 percent during that span.
Yet, job openings in construction totaled 345,000 at the end of November, according to the Bureau’s Job Openings and Labor Turnover Survey. That was a 32-percent jump from a year earlier and the largest total, by far, for any November in the 21-year history of the survey. (Because construction hiring varies over the course of the year, it is not meaningful to compare openings in November to other months.) These figures imply that contractors would have increased their headcounts even more if they had been able to fill more vacancies.
Unfortunately, filling vacancies may become even harder in the near future for a couple of reasons. First, construction workers may be more likely to incur COVID-19 than other workers. An ongoing survey of Facebook users—not a scientific sample but a very large one, with consistent results from week to week—showed that in the last week of December, only 58 percent of respondents who identified themselves as construction workers reported being vaccinated, compared to 84 percent of respondents in other occupations. Conversely, construction respondents were nearly three times as likely as others to report “vaccine hesitancy”. Given that unvaccinated individuals are far more likely than those who have been jabbed to become sick or hospitalized, construction firms may have difficulty fielding full, healthy crews. In addition, even healthy unvaccinated construction workers may be barred from jobsites at which owners require all personnel to be vaccinated.
Even apart from possible harm from COVID-19, construction firms are losing ground to other sectors in terms of pay and working conditions. From 2006 to 2019, pay, reported as hourly earnings in the BLS’s monthly employment report, averaged 20 to 23 percent more for “production and nonsupervisory employees” in construction—mainly hourly craft workers—than in the overall private sector. That “premium” shrank to 17 percent in late 2021 as historically low-paying industries such as fast food, warehousing and local delivery dramatically raised starting pay and added sign-on or retention bonuses. Many more companies across the economy now allow remote or hybrid work or flexible hours, incentives that are not possible for onsite construction tasks. The implication is that construction firms risk losing potential and existing workers unless they sharply increase pay or find other ways to entice applicants.
Contractors face yet another challenge in coping with fast-changing materials costs, although the nature of that challenge is also changing. The BLS’s Producer Price Index (PPI) for inputs to new nonresidential construction is a weighted measure of the selling price of all materials and services that contractors buy from manufacturers, wholesalers and other intermediaries as well as service providers such as trucking companies. That index plunged at the beginning of the pandemic in early 2020, when it appeared the economy might go into a prolonged lockdown. Instead, shortages and supply-chain bottlenecks quickly emerged, driving up the index by an unheard-of 27 percent in just 14 months from April 2020 to June 2021. Meanwhile, the PPI for new nonresidential-building construction, a measure of what a fixed group of contractors tells the BLS each month they would charge to put up a particular building, rose just 2.9 percent over the same interval.
In the second half of 2021, input costs and bid prices both displayed different patterns from before. The extreme run-up in prices of wood, steel, copper and other products flattened or turned negative. At the same time, contractors found owners more accommodating of cost passthroughs. From July to December 2021, the PPI for inputs to construction slowed to a 2.6-percent cumulative increase, while the bid-price PPI climbed 9.5 percent.
Contractors cannot assume that their cost worries are over, however. Like COVID-19 itself, prices for materials can flare up at any time. After plunging in the autumn of 2021, lumber futures more than doubled at the end of the year and in early January. Retail prices for diesel fuel and copper have also spiked again. Thus, contractors are at risk of bidding on projects with erroneous expectations they will be able to buy materials at current prices or less. They are also vulnerable to pressures from owners to reflect the latest dips in prices without offsetting protection against possible later upturns.
Thus, it appears contractors will have lots of opportunities in 2022 to bid on more projects. But they are at risk of not having enough workers to execute the projects they win and being caught on the wrong side of materials’ price movements.