By Anirban Basu, Sage Policy Group, Inc.
And Then the Problems Mounted
At the beginning of the year, the U.S. economy appeared to be an irresistible force. In January, even after an economic expansion that spanned longer than a decade, the economy still managed to create 214,000 new jobs. It followed that month with another 251,000 jobs in February.
The unemployment rate, which had peaked at nearly 10 percent during the Great Recession, fell to a minuscule 3.5 percent, effectively a 50-year low. In a rare turn of events, the number of job openings outnumbered the number of unemployed people looking for work, an indication that employers were desperately looking for skilled workers.
This was especially true in construction, where numerous surveys found that the lack of skilled men and women topped the list of concerns for many contractors. The number one issue facing contractors coming into this crisis was finding enough workers to get the job done well, on time and on budget. Contractors routinely complained about the ongoing and worsening shortfall of carpenters, electricians, HVAC professionals, roofers, glaziers, superintendents, and estimators. But at least they could take comfort in their lengthy backlogs and the notion that they could expect to stay busy for the foreseeable future.
Then, in November of 2019, there was talk of a strange new pneumonia that began to spread throughout Asia and then eventually the entire world. This hardly seemed worthy of focus, at least for a time. The world had experienced other outbreaks in recent times, whether in the form of SARS, MERS, H1N1, Zika, Ebola, or other maladies. None of those had done much to upset America’s economic momentum.
Outbreaks of respiratory distress followed in Europe and eventually in the United States, whether in long-term facilities in Seattle or in large sections of New York City. This was no ordinary pandemic. This was a life-altering game changer. Eventually, public policymakers saw fit to shut down the U.S. economy in March, and what had appeared to be an irresistible force met an immovable object known as COVID-19.
After adding jobs for 113 consecutive months in February 2020, the U.S. labor market buckled. Construction benefited from a massive backlog coming into the crisis and its enviable essential industry status in much of the nation. But even the construction industry began to hemorrhage tens of thousands of jobs. That said, many other economic segments suffered proportionately more, including segments like leisure, hospitality, retail trade, and other sectors hammered by social distancing mandates.
Remote work became the norm, resulting in less demand for office space in both the short- and long-terms. Both business and leisure travel came to a grinding halt, ravaging the hotel sector. None of this was good for the construction, at least for contractors who specialize in new construction.
True, some segments benefited. Relegated to their homes, many turned more aggressively to e-commerce to satisfy their needs, bolstering the fortunes of companies like Amazon, Chewy, Wayfair, and online specialists. That has and will continue to bulk up demand for fulfillment and data centers. Many American CEOs have become frustrated by persistent supply disruptions involving Asia, and have committed to more reshoring of production to the United States. Eventually, that will translate into more investment in industrial facilities. There is also likely to be more investment in America’s healthcare capacity, given the realization that the nation needs more space for intensive care unit beds and ventilators.
The Construction Outlook
Despite all of this, the bad outweighs the good. The shields that served to protect the construction sector have begun to weaken. Many projects have been postponed. Others have been cancelled. Supply chain disruptions have rendered certain inputs difficult to obtain. Some materials prices, like those attached to softwood lumber, have been surging during much of the crisis. Project interruptions have been plentiful, including due to COVID-19 infections among workers.
After many contractors burn through their existing backlog, there will generally be fewer opportunities going forward, especially if state and local government tighten their budgetary belts and cut back on large scale capital projects. With this in mind, the incoming administration in Washington, D.C. will need to address these issues if they want a speedier economic recovery. The probability of a large-scale infrastructure packaging coming out of the nation’s capital grows by the day.
There is at least one segment with a positive outlook. Increased desire to social distance, need for more space for a home office, and ultra-low mortgage rates have accelerated home sales. As a result of these factors and a low inventory of unsold homes, residential construction has flourished. According to the latest data from the U.S. Census Bureau, construction spending for the segment was up 2.9 percent in October over the previous month. On a year-over-year basis, residential construction spending was up an impressive 14.6 percent.
Subcontractors who specialize in single-family projects are likely to be seeing plenty of work in the short term. Employment data from the U.S. Bureau of Labor Statistics show that residential construction has registered steady growth in recent months. Data indicate the residential segment added more than 15,000 net new jobs in November. The bulk of these positions were among residential specialty trade contractors.
Circumstances in commercial demand are far more dire. Retailers have gone bankrupt in large numbers, including the likes of Pier 1 Imports, Brooks Brothers, Neiman Marcus, J. Crew and JC Penney. The result is a massive overhang of underutilized retail space in much of the nation. Many office workers have proven as or more productive working from home than in the office, dampening expected future demand for new office buildings. Business travel is not expected to come back anytime soon, which will limit the recovery of the lodging sector. Lodging-related construction spending has declined by more than 20 percent over the past year, and a variety of leading indicators suggest more decline over the months to come.
At this point, it appears that 2021 will be a difficult year for many contractors. The wildcard is stimulus. A federal infrastructure package would go a long way toward accelerating the sector’s recovery, first among those that specialize in public works, and then those who work in commercial segments. Infrastructure investment often opens up new private development opportunities. While many Americans would agree that the nation would benefit from stepped up infrastructure investment, both to address infrastructure deficits and to accelerate economic recovery, the politics of Washington, D.C. are complex and often unpredictable.
About the Author
Anirban Basu is the Chairman and CEO of Sage Policy Group, Inc., an economic and policy consulting firm headquartered in Baltimore. Anirban serves as the chair of the Maryland Economic Development Commission and serves as the chief economist to Associated Builders and Contractors and the Chief Economic Advisor to the Construction Financial Management Association. He is a highly sought after public speaker known for his humorous and informative presentations. You can contact Anirban at Inquiries@sagepolicy.com or www.sagepolicy.com.
