Construction backlog and economic forecast tilt in the face of a persistent supply crisis

“The non-residential construction backlog fell for a second consecutive month as skills and input shortages hit the industry,” said Anirban Basu, chief economist at Associated Builders and Contractors. “A growing number of contractors are reporting shortages of materials such as copper and PVC pipe. “

The construction order book indicator fell to 7.6 months in September, according to a survey of ABC members from September 20 to October 4. The reading is down 0.1 months from August 2021, but up 0.1 months from September 2020.

“Input prices also continue to rise as disruptions in the global supply chain persist,” Basu said. “Rising shipping and trucking costs make the situation even worse by putting additional upward pressure on input prices. In conjunction with the resulting skills shortages and higher wages, rising input prices lead to high bids, prompting some project owners to delay work and even cancel projects altogether in some cases.

“The good news is that demand for construction services remains high,” Basu said. “A lot of projects, be it healthcare, public education or data management, need to move forward, and the data indicates that this is disproportionately benefiting the biggest entrepreneurs. For the most part, recent declines in the order book have been recorded among small construction companies. Low interest rates and abundant liquidity have enabled many investors to deploy substantial capital, which helps support investment in real estate and construction projects.

“Despite all the challenges facing the non-residential construction industry, contractors collectively expect sales, personnel and profit margins to increase over the next six months, although the level of confidence has waned. in recent months, ”Basu said.

Readings of ABC’s Confidence in Construction Index – a measure of entrepreneurs’ confidence in growing sales, profit margins and staffing levels – each declined in September. But each remains above the 50 threshold, indicating growth expectations over the next six months.Click on this table for a larger viewBuilders and Associate Contractors Confidence in Construction Index

Coincidentally, the Wells Fargo Economics Group has reduced its forecasts for the entire US economy In light of the strangulation, even an endangered pandemic has maintained an oversupply of all kinds of inputs, materials and goods. Wells Fargo has lowered its growth forecast for 2022 by half a percentage point to 4.0%, and expects economic activity to really pick up, “as supply chains tighten up. normalize, perhaps as early as the second half of next year “.

The seven-day moving average of new COVID cases has fallen to around 85,000, after surpassing 170,000 at its peak on September 13. But as one problem subsided, another got worse. Over the past few weeks, supply chain issues have grown from a major headache to an outright crisis.

Wells Fargo economists remain concerned about the impact of COVID on consumer spending, but a significant reduction in consumer spending does not appear likely unless the new number of COVID cases significantly exceeds its current level.

“We expect real GDP in the United States to grow 5.6% in 2021,” says Jay H. Bryson, Ph.D and chief economist at Wells Farog. “This still marks the strongest full year for economic growth in the United States since 1984, but it is a significant drop from the 7.3% rate we predicted in early June when the new COVID cases averaged around 15,000 per day and before the prospects of a more dynamic rebound were ruined by the Delta variant.

Materials are not the only ones to be lacking. Job growth has been only sluggish in recent months, as a record share of companies report workers are hard to find. Consumers agree. Of those polled by the University of Michigan, more people say there are plenty of jobs than at any time in the past half century. The problem is not on the demand side, it is a problem of labor supply, as many still fear COVID in the workplace, cannot find or afford to babysit or are simply unable or unwilling to do the jobs available today.

“Nonetheless, above-trend real GDP growth should lead to solid wage bill growth over the coming months, and we expect the unemployment rate, which currently stands at 4.8%, will tend to decline over the next few months. during our forecast period, ”said Bryson. “With the economy growing at an above-trend rate and the labor market continuing to recover, we believe the Federal Open Market Committee (FOMC) will eventually take its foot off the monetary policy accelerator. “

Headline inflation figures on personal consumption expenditure reflect the highest level seen in over 30 years.

The Federal Reserve currently purchases $ 80 billion in Treasury securities and $ 40 billion in mortgage-backed securities per month. The precise timing of the Fed’s spending cuts was called into question by weak job growth in September. “We believe policymakers will set the pace so that buying ceases by mid-2022, which should contribute to the rise in long-term interest rates that we expect in the coming quarters.

“However, rate hikes are not on the agenda, as the FOMC will likely wait for the labor market to move closer to ‘maximum’ employment until it starts to raise rates, a condition which we believe will not be met until the second half of 2023 We expect the committee to increase its target range for the fed funds rate by 75bp in the last two quarters of 2023. “

Wells Fargo expects residential investment overall to maintain momentum as the slight moderation in single-detached home purchases is offset by accelerating multi-family spending.

Total non-residential spending year-to-date is down 6.7% from the first eight months of 2020, and most major categories of non-residential spending remain low. While Wells Fargo has modestly reduced its outlook for structural spending, the bank’s economists still expect a solid pace of improvement in the coming years.

“The architectural billing index, which dominates non-residential construction spending by roughly a year, has been in expansion territory (over 50) for seven consecutive months, suggesting that non-residential activity should strengthen. . However, the price and availability of building materials remain significant barriers. The shortage of skilled labor has also become a barrier for the construction industry. “

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