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Construction Industry Insight | Spring 2022


5/11/2022 This document focuses on a number of topics that pertain to the construction industry as a whole, including the top equipment acquisition trends for 2022, continued challenges associated with a workforce shortage, the impact of the war in Ukraine on fuel and material prices, the Biden administration mandate requiring that U.S. iron and steel be used for all infrastructure projects, and the growth in nonresidential construction jobs in March. It also includes a brief summary of trends in used equipment values.

Hot Topics
Top 10 Equipment Acquisition Trends for 2022. The Equipment Leasing and Finance Association, representing the nearly $1 trillion equipment finance sector, recently published what it expects to be the top 10 equipment acquisition trends for 2022. Private investment by U.S. businesses in equipment and software is forecast to be almost $2 trillion in 2022, with a substantial amount of that investment activity financed. As such, the following anticipated trends will impact a significant portion of the U.S. economy.

1. Economic Growth. Look for GDP growth of 3.5% in 2022, as the availability and effectiveness of vaccines reduce pandemic risks.

2. Equipment Shortages. Delivery bottlenecks will likely persist, due to supply chain disruptions.

3. High Inflation. Inflationary pressures will continue. In response, the Federal Reserve has announced several planned interest rate hikes in 2022, one of which has already taken place.

4. Capital Spending. With continued capital spending, though not as robust as that experienced during the first half of 2021, equipment and software investment growth of 4.6% is expected.

5. Equipment Financing. Equipment finance will play a significant role in economic growth. Based on historical precedent, more than half of equipment and software investment this year will be financed.

6. Politics. New legislation, including the long-awaited federal infrastructure law enacted by Congress, will pose both opportunities and challenges to capital spending.

7. Pandemic Impact. Ongoing remote/hybrid work arrangements and a push for further automation will drive demand for new types of equipment and software as businesses continue to adapt to the “new normal.”

8. Key Equipment Types. Trucks, oil & gas equipment, and materials handling equipment should benefit from sustained demand. Conversely, automobiles, construction machinery and agricultural equipment may continue to face pandemic-related headwinds such as input shortages, high energy prices and volatile demand conditions.

9. Business Focus on Digitization and Data. As investment in digitization accelerates across most industries, businesses will leverage both customer and external data to gain competitive advantages in areas such as customer behavior and market dynamics.

10. Wild Cards. Factors such as future COVID variants, ongoing labor shortages, passage of some form of the “Build Back Better” spending package, and mid-term elections could all influence capital spending.

Construction Industry Faces Workforce Shortage of 650,000. According to a model recently developed by Associated Builders and Contractors (ABC), to meet the demand for labor in 2022 the construction industry will need to attract nearly 650,000 additional workers on top of the normal pace of hiring. ABC’s workforce shortage analysis clearly shows that the construction industry is in desperate need of qualified, skilled craft professionals. The Infrastructure Investment and Jobs Act passed in November and stimulus from COVID-19 relief will pump billions in new spending into our nation’s most critical infrastructure, and qualified construction professionals will be essential to efficiently modernize roads, bridges, energy production and other projects across the country. At the same time, more regulations and less worker freedom will make it harder to fill these jobs.

“The workforce shortage is the most acute challenge facing the construction industry despite sluggish spending growth,” said ABC Chief Economist Anirban Basu. “After accounting for inflation, construction spending has likely fallen over the past 12 months. As outlays from the infrastructure bill increase, construction spending will expand, worsening the gap between supply and demand for labor. An added concern is the decline in the number of construction workers ages 25-54, which fell 8% over the past decade. Meanwhile, the share of older workers exiting the workforce has soared. According to the Centers for Disease Control and Prevention, the industry’s average age of retirement is 61, and more than 1 in 5 construction workers are currently older than 55.

“The scarcity of qualified skilled workers is an even more pressing issue,” said Basu. “Since 2011, the number of entry-level construction laborers has increased 72.8%, while the number of total construction workers is up just 24.7%. The roughly 650,000 workers needed must quickly acquire specialized skills,” added Basu. “With many industries outside of construction also competing for increasingly scarce labor, the industry must take drastic steps to ensure future workforce demands are met.”

War in Ukraine Impacts Fuel and Material Prices. Russia’s invasion of Ukraine is wreaking havoc on diesel fuel and gasoline prices, while exacerbating price and supply pressures on metals, lumber and electrical equipment, particularly transformers. The day after Russia invaded Ukraine, Ken Simonson, Chief Economist for the Associated General Contractors of America wrote, “The war in Ukraine and the West’s response are likely to have multiple effects on construction materials costs and availability. The most immediate impact is likely to be on diesel fuel and gasoline prices.” Indeed, diesel and gasoline prices have continued to rise as Russia is a major exporter of oil. On March 21, the national retail average price of diesel fuel was $5.13 per gallon, and gasoline prices rose to an average of $4.24.

Certain metals commonly used in construction are also facing price and supply pressures, as cargo ships in the region around the Black Sea have been halted or delayed. In addition, the war is worsening supply chain and pricing issues for lumber. Inventory sitting at mills and extended lead times on shipments are back to being the norm. As a result, pricing continues to climb as availability continues to decline.

During February, prices for copper-based wire, cable prices, electrical equipment and transformers also rose, reflecting higher shipping costs. “Electrical equipment units remain in tight supply, particularly in the North American market, as a result of prolonged component shortages and high metal input costs,” said David Smith, IHS Markit analyst for electrical machinery and equipment. “One category in particular, transformers, is experiencing the worst of these effects, as manufacturers struggle to acquire grain-oriented electrical steel tonnage. That steel is on allocation in the U.S. and is only made at one mill domestically, further tightening domestic transformer supply. These high input costs coupled with shipping backlogs will support price increases for electrical machinery through the end of 2022.”

Biden Administration Mandates U.S. Iron & Steel for Infrastructure Projects. According to a White House memo, effective May 14, 2022, all projects funded by the $1.2 trillion infrastructure package must only use iron and steel produced in the U.S. This requirement, which was included in the Infrastructure Investment and Jobs Act, applies to all manufacturing processes for the metals, from the initial melting stage through the application of coatings. The requirement may be waived only if domestic materials are not reasonably available or would raise the cost of the project by more than 25%. Kevin Dempsey, President and CEO of the American Iron and Steel Institute trade group, responded “This announcement is an important first step toward ensuring the fullest possible implementation and enforcement of Buy America domestic procurement preferences by all federal agencies.”

To put the new requirement in perspective, during 2021 U.S. imports of iron and steel reached about $38.9 billion, the highest level since tracking began in the early 1990s. The administration did not say what percentage of construction material for current infrastructure projects is U.S.-produced, or what portion of the $350 billion in infrastructure funding being spent this year is being spent on U.S.-made goods.

While the new requirement will effectively enable government officials to know how many dollars go to U.S. workers and factories, construction association executives question whether the rules will add to already soaring construction costs and high inflation. Stephen E. Sandherr, Associated General Contractors of America CEO, believes the new guidance will ultimately undermine infrastructure spending benefits. “It makes no sense to place unrealistic limitations on firms’ ability to source key materials at a time when prices for those products are skyrocketing and supplies are limited,” said Sandherr. “Supply chain shortages are already prompting firms to avoid bidding on new projects.” According to a JLL construction report, materials costs increased 21.2% from February 2021 to February 2022, and are expected to increase another 8% to 12% over the next year.

Nonresidential Construction Adds 11,300 Jobs in March. According to an April 1 release by the U.S. Bureau of Labor Statistics, the construction industry added 19,000 net jobs in March. After 23 months of recovery, construction employment has at last exceeded pre-pandemic levels. On a year-over-year basis, industry employment has expanded by 220,000 jobs, an increase of 3.0%. Nonresidential construction employment expanded by 11,300 net positions, with all three subsectors generating growth. Heavy and civil engineering added 5,000 net new jobs, nonresidential specialty trade contractors added 3,700 positions, and nonresidential building added 2,600 jobs. The construction unemployment rate fell to 6.0% in March, while unemployment across all industries declined to 3.6%.

“Contractors continue to signal that they are searching far and wide for additional workers,” said ABC Chief Economist Anirban Basu. “With more workers reentering the labor market, job openings continue to translate into employment growth. Given elevated backlog and the expectation that demand for services will remain high, construction employment is poised to grow further this year. “Interestingly, the unemployment rate for construction workers is well above the economywide rate,” said Basu. “This is at odds with the notion of a severe worker shortage facing construction. The issue relates to skill sets. While many refer to the current circumstances as a labor or worker shortage, it is perhaps more properly characterized as a skills shortage.

“With infrastructure spending set to rise and construction workers retiring at a rapid rate, skills shortages are likely to worsen going forward,” said Basu. “That translates into rapid wage growth. Given high and rising materials prices, project owners will continue to see elevated bids for construction service delivery, although how this will affect project postponements and cancellations remains unclear.”

Trends in Used Equipment Values
Since the start of the pandemic, equipment manufacturers have faced challenges similar to other industries, such as auto and commercial trucking, in terms of supply chain disruptions and getting new product to their customers in a timely manner. In a recent survey conducted by Equipment Watch, 56% reported that they have experienced delays in delivery of their new equipment, while 53% said they have noticed a lack of availability of new equipment for purchase.

The above trends for new equipment have also had a direct impact on the used equipment channels, with activity for the resale channel in particular seeing declines throughout the year. Forty percent of respondents to the survey experienced this trend firsthand, reporting that they have observed a lack of availability of used equipment for purchase. Considering the dynamics that equipment owners are facing, it is not be surprising that 40% of those surveyed intend to purchase more new equipment, 34% intend to purchase more used equipment, and 25% intend to increase their use of rental equipment. Nearly half (46%) also reported that they intend to increase sales of their own equipment. With construction activity predicted to be high in 2022, construction firms are looking to replace their equipment and expand their fleets to meet their business needs and are just waiting for the equipment market to catch up.

What this means for the buyer and/or seller:
• Expect to wait longer for new equipment availability
• Expect to pay up to 15% premiums above sticker price on new equipment
• Expect to pay higher than normal pricing for older equipment
• Expect that used options will be minimal as inventories will continue to diminish
• Expect the used options will be older and have more hours