All things considered, contractors can expect healthy growth this year

Contractors’ confidence in profit margins and staffing levels slipped in May amid rising input prices, but it looks like there will be plenty of work to go around, according to data from the U.S. Bureau of Labor Statistics.

Construction input prices increased 4.6% in May compared to the previous month, according to an analysis of the Bureau’s Producer Price Index data by Associated Builders and Contractors (ABC). Nonresidential construction input prices increased 4.8% for the month.

Construction input prices are 24.3% higher than a year ago, while nonresidential construction input prices increased 23.9% over that span. Similar to last month, all three energy subcategories registered significant year-over-year price increases. Crude petroleum has risen 187%, while the prices of unprocessed energy materials and natural gas have increased 100% and 90%, respectively.

The price of softwood lumber has expanded 154% over the past year.

“The specter of elevated construction input prices will not end anytime soon,” said ABC Chief Economic Anirban Basu. “While global supply chains should become more orderly over time as the pandemic fades into memory, global demand for inputs will be overwhelming as the global economy comes back to life.”

He continued, “Domestically, contractors expect sales to rise over the next six months, as indicated by ABC’s Construction Confidence Index. This means that project owners who delayed the onset of construction for a few months in order to secure lower bids may come to regret that decision.

“Many economists continue to believe that the surge in prices is temporary, the result of an economic reopening shock,” said Basu. “To a large extent, they are correct. The cure for high prices is high prices. When prices are elevated, suppliers have greater incentive to boost capacity and bolster output. That dynamic eventually results in a downward shift in prices. Operations at input producers should also become smoother over time as staff is brought back and standard operating procedures are reestablished.

“Still, there are some things that have changed during the pandemic and will not shift back,” said Basu. “For instance, money supply around the world has expanded significantly. Governments have been running large deficits. This means that some of the inflationary pressure that contractors and others are experiencing may not be temporary, and that inflation and interest rates may not be as low during the decade ahead as they were during the decade leading up to the pandemic.”

ABC reported its Construction Backlog Indicator rose to 8.0 months in May, according to a member survey conducted from May 20 to June 2. That’s 0.1 months higher than April 2021 and May 2020 readings.

While ABC’s Construction Confidence Index readings for sales increased modestly in May, confidence regarding profit margins and staffing levels slipped. All three indices remain above the threshold of 50, however, indicating expectations of growth over the next six months.

“Nonresidential construction backlog continues to edge higher, consistent with expectations that sales, profit margins and

staffing will expand over the next six months,” said Basu. “For at least four reasons, this represents an extraordinary set of findings.

“First, materials prices have risen significantly over the past year and labor costs are also on the rise,” said Basu. “All things equal, one might think this would suppress profit margin growth. Apparently, demand for construction services is strong enough to generate sufficient pricing power to more than fully countervail those factors.

Second, skills shortages continue to impact the construction industry and many other segments. Despite that, Basu said the average nonresidential contractor expects to expand their teams during the months ahead. 

“Third, conventional wisdom suggests that commercial real estate fundamentals are weak in the context of remote working, online shopping and sluggish business travel,” said Basu. “Nonetheless, backlog in the commercial category remains stable.”

He concluded, “Fourth and finally, while there has been much talk about a federal infrastructure plan, it remains elusive. Nonetheless, backlog in the infrastructure category rose significantly in May, perhaps a reflection of stronger state and local government balance sheets and associated increases in infrastructure outlays.

“In sum, contractors can expect healthy growth in activity through the balance of 2021,” Basu stated.