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Construction Industry Insight | Spring 2021


This document focuses on a number of topics that pertain to the construction industry as a whole, including challenges and opportunities ahead, the anticipated impact of Biden’s infrastructure plan, uncertainties stemming from the halt to the Keystone project, the decline in construction employment, and the significant rise in Caterpillar’s stock price. It also includes a brief summary of trends in used equipment values.

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Construction Industry Challenges and Opportunities in 2021: Each year comes with a number of challenges for different industries around the world and the construction industry is no exception. Even with observable growth, there are still certain setbacks and problems that try to slow this development. Some of the challenges the industry is currently facing are as follows.

1. The Covid-19 Pandemic. Contractors, developers, workers, and owners have all been impacted by the Covid-19 pandemic. The new normal affects almost every aspect of the industry, from construction activities to the slow movement of supplies. Some projects have even had to be terminated. Global construction output has been projected to fall by 3.1%, a sharp contrast to the 3.1% increase recorded in 2019. The industry has struggled to complete projects while at the same time trying to protect its employees. However, firms are making an effort to correct this by implementing new strategies. Most of them have tried downsizing in several areas, while others try to work within modified timeframes. This responsiveness remains vital if the industry is to pull through these trying times.

2. Slow Technology Adoption. Numerous surveys and studies have shown that the construction industry has been slow to adopt new technologies. Stakeholders and business owners are guilty of underinvesting in technology even though technologies such as drones, VR, robots, 3D printing, and IoT can help to solve their industry challenges. As we approach the time when modern technologies will be a vital component of the industry, the companies that adopt them early will reap the rewards, while others will likely fall by the wayside.

3. Shortage of Skills. Even before the pandemic, the industry was already facing this problem. The construction industry has not been attracting enough skilled personnel to meet its growing demand. A recent survey showed that 75% of companies are looking to add to their headcount, while 78% struggle to find qualified personnel. To make matters worse, 21% of the industry’s employees are 55 years of age or older. By contrast, just 9% are under the age of 25. The rate at which the older generation of workers is retiring is higher than that of the incoming younger generation. As a result, construction firms will continue to struggle as they look for employees to meet their demands.

4. Worker Safety. For years, worker safety has been an issue in the construction industry, which has experienced the greatest number of injuries and deaths. The injuries also slow down production as the median time that an injured worker is away from work is ten days. This can easily be prevented. Protecting employees should be a top priority of all construction business owners. Companies with strong safety programs typically have higher levels of productivity. Regular training and safe work practices need to be strictly enforced.

5. Stagnated Levels of Production. Unlike other industries, the construction industry has shown little improvement when it comes to productivity. Even though industry sectors such as agriculture continue to reach new heights of productivity, the industry as a whole has remained at the same level it was twenty years ago. Moreover, productivity is projected to decline if changes are not made. This is troubling, especially with construction projects becoming more complex. Poor communication between the stakeholders, poor scheduling, inadequate planning, and wasted time are among the factors contributing to the problem. In fact, it has been found that many employees sit idle while waiting for supplies and materials to be delivered. However, there are still reasons to be hopeful. For example, construction methods that require high-level communication, such as design-build, have been adopted. At the same time, technological advancements and project management software are expected to change the industry, albeit gradually.

Construction Industry Awaits Biden’s Infrastructure Plan: In March, the Biden administration is expected to unveil details of a longer-term economic recovery plan focused on infrastructure. The plan would invest some $2 trillion over four years to build and repair roads, bridges and ports, create affordable housing and improve broadband networks. This will be welcome news to the construction industry. Recent numbers from the Census Bureau show construction spending, overall, was up almost 6% in January compared to December 2019. However, excluding residential construction (homebuilding and remodeling) it’s a much different story. In industries like hotels, office and retail space, and transportation, that have been hurt by the pandemic, construction is down.

“On the private, nonresidential side, every category was down, many of them very sharply from a year ago,” said Ken Simonson, Chief Economist with the Associated General Contractors of America. “I think the outlook for nonresidential spending is pretty grim for the next few months. A massive infrastructure spending bill would help, Simonson said, but he isn’t celebrating yet. Former President Trump also promised a big infrastructure package, which never materialized.

The need has only grown since then, said Kevin DeGood, director of infrastructure policy with the Center for American Progress. “The money coming from Washington really has to do two things,” he said. “It has to backfill what’s been lost and what would otherwise have been spent under normal economic conditions by state and local governments, as well as then provide a boost on top of that.” Then there’s the question of who’s going to do all the building and paving and wiring. The industry is facing a long-term shortage of skilled workers that dates back to the last recession.

Any infrastructure plan will have to come with more recruiting and training, said Grant Shmelzer, executive director of Independent Electrical Contractors Chesapeake, who has mixed feelings about a sudden surge in demand. “Definitely excitement, definitely hesitation in the same breath, due to labor shortages,” he said. “If the bill actually goes through Congress, the next hurdle is going to be how do we do all the work that the bill would bring to fruition?”

Halt to Keystone Project Means Uncertain Future for Pipeline Construction Workers: Workers in the pipeline construction industry face an uncertain future, not only on Keystone XL but longer term as jobs move to other energy sectors. Just hours after his inauguration ceremony, President Biden fulfilled one of his campaign promises with an executive order that revoked the presidential permit issued by the Trump administration for the Keystone XL pipeline project. While the move was applauded by environmentalists and indigenous tribes in the regions impacted by the pipeline, it drew swift criticism from those within the construction and energy sectors.

Despite urging from many, including Canadian Prime Minister Justin Trudeau, to reconsider the decision, Biden continues to stand firm, resolving to transition the U.S. away from fossil fuels to a more sustainable and environmentally responsible future, while promising to create new clean energy-related jobs to replace those lost. In the meantime, more than 42,000 jobs are at risk on Keystone XL, with a sizable percentage consisting of construction workers assigned to the project. In this massive undertaking, which involves 875 miles of pipeline extending from Montana to Nebraska, construction contracts, materials and support purchased in the U.S. would total approximately $3.1 billion, with another $233 million spent on construction camps for workers in remote areas over the up to two-year construction period. It has been estimated that the pipeline’s construction would contribute as much as $3.4 billion to the U.S. GDP.

Construction workers have been substantially impacted over the years by ongoing political battles related to Keystone XL, including the on again/off again permitting process. Now, many will face economic constraints as Keystone grinds to a halt, along with uncertainty for future pipeline opportunities under the Biden administration. While the administration has assured the American public that jobs lost will be replaced by those created in the clean energy sector, workers remain skeptical. They are also reluctant to leave their current work behind for what they describe as less satisfying and potentially lower paying jobs in fields such as wind turbine installation. Until the promised employment in clean energy picks up, the workers on Keystone XL, and other existing and anticipated pipeline projects, remain in limbo, wondering what comes next for them.

Construction Employment Down Nearly 7% Year Over Year: According to an analysis performed by the Associated General Contractors of America, construction employment declined by 61,000 from January to February, the first overall decline since April 2020. At the same time, the sector’s unemployment rate rose to 9.6% amid severe winter weather and continuing weakness in new nonresidential projects. The job loss was concentrated in nonresidential construction, which experienced a decline of 60,800 jobs in February, following a dip of just 400 jobs the prior month. For the month of February, nonresidential construction jobs totaled 316,000, representing a 6.8% decline from a year earlier.

“The steep decline in construction employment in February continues a downward trend in nonresidential activity that began before the disruptions caused by last month’s freezes and power losses,” said Ken Simonson, Chief Economist for the Associated General Contractors of America. “Despite recovery in some parts of the economy, private nonresidential construction is still experiencing many canceled and postponed projects and few new starts.”

Despite the significant decrease in construction employment, Anirban Basu, Chief Economist for Associated Builders and Contractors, believes the numbers are not cause for alarm among commercial contractors, citing weather-related interruptions in the South that likely resulted in temporary job losses. In recent months, contractors have become more upbeat regarding industry prospects, as shown by the Associated Builders and Contractor’s Construction Backlog Indicator, which shows rising backlog and expectations for rising employment, sales and profit margins. “The balance of the economy appears to be outperforming expectations in terms of labor market recovery, and there is now growing evidence that more pervasive vaccinations are beginning to shape economic outcomes for the better,” said Basu. According to a new report issued last week, despite coronavirus-induced layoffs, construction employees are becoming harder to find and more expensive. In January 2021, the average hourly earnings of construction employees reached $32.11, the highest level ever, and average weekly hours worked rose to their highest level since the third quarter of 2019.

Caterpillar Stock Rises to All-Time High: Shares of Caterpillar soared 18.1% in the month of February, reflecting positive macro developments that set the blue chip stock on fire. The stock price got its first boost on January 29 when the company topped estimates on its fourth-quarter revenue and earnings, and management sounded optimistic about 2021 given a better-than-expected recovery in most end markets, particularly construction. In February, encouraging signs started to show up for Caterpillar from all sides. First, commodity prices showed no signs of slowing down. For example, copper prices hit highs not seen in ten years, spurring hopes of higher spending from mining companies and more sales for Caterpillar’s resource industries segment. In addition, oil prices topped $60 per barrel, which bodes well for Caterpillar’s energy and transportation segment. Coincidentally, Caterpillar also completed its acquisition of the Weir group’s oil and gas business just as oil prices started to rally, giving investors a feel that the deal might have been perfectly timed.

A number of other factors also contributed to the surge in Caterpillar’s stock price. In February, Deere & Company, a primary rival, reported strong earnings and upgraded its fiscal-year 2021 earnings outlook by a wide margin on the back of strong demand from the agriculture and construction sectors. Meanwhile, the COVID-19 vaccination rollout fired up hopes of a faster economic recovery, as did expectations derived from President Biden’s proposed $2 trillion infrastructure plan. As the world’s largest construction-equipment manufacturer, Caterpillar is set to be one of the biggest beneficiaries of an infrastructure spending program. Finally, the Institute for Supply Management’s Purchasing Managers Index, a key indicator of manufacturing activity in the U.S., hit a three-year high in February. That, along with a surge in oil prices, which is excellent news for Caterpillar’s largest segment, and the other factors cited above are reasons enough to justify the stock’s recent rally to all-time highs.

Trends in Used Equipment Values
The secondary market for construction equipment has remained stable throughout the COVID-19 pandemic and the economic recession. Under the uncertain economic conditions caused by these factors, many buyers previously in the market for new assets have opted for used or leased equipment to save costs and to avoid the long-term risk of ownership. As a result of the heightened demand, the inventory at public auctions for late model equipment with lower hours of service has been limited. This is particularly true for small to medium size equipment, including Compact Track Loaders, Loader Backhoes, Small Dozers, and small to medium size wheel loaders, due in part to the rise in residential real estate construction during 2020. Consequently, the pricing for these pieces has either remained stable or improved.

By comparison, there appears to be no shortage of 80-ton size hydraulic excavators (Caterpillar 336 / John Deere 350G). This is largely attributable to the slowdown in pipeline construction work for which many of these machines were being rented and utilized. There is also no shortage of general rental-house type equipment such Scissorlifts, Boomlifts, or Telescopic Forklifts.

Going forward the demand for used equipment is likely to continue as the road to recovery is expected to be a long one. In fact, Dodge Data & Analytics recently predicted that total U.S. construction starts will increase just 4% in 2021, to $771 billion, after declining by an estimated 14% in 2020. That, along with the anticipated passage of a large Infrastructure bill by congress bodes well for pricing in the used construction equipment market.