At the 2022 IRMI Construction Risk Conference, the President and CEO of FMI Corporation, Chris Daum, presented the opening session, providing insight into the construction economic outlook, trends that may impact the risks contractors face in their day-to-day operations, and some short- and long-term challenges and opportunities for the industry.
Currently, we are operating in a “less for more economy” with high inflation driving prices for almost everything. In all previous U.S. recessions, the price of crude oil has increased by over 50%, which has happened twice in the last two years. In the construction industry, nonresidential costs have increased over 25% in the last year. In response to the pandemic, the federal government injected over $5 trillion in stimulus funds to boost the economy, increasing debt by 245% and overstimulating the economy. These stimulus funds increased consumer spending, resulting in supply chain shortages and dramatic inflation. Personal spending increased over 16% during a 12-month period, but millions were still unemployed. In fact, compared to the expected growth patterns before the pandemic, the U.S. workforce is still missing over 2.8 million workers.
The economy was also adversely impacted by a Zero Interest Rate Policy (ZIRP) which was pursued for many years in several countries including the U.S. With no-risk free yields available, this led to poor investments in risky ventures. A return to “normal” interest rates compared to the historic lows consumers are used to experiencing, can actually be beneficial for the economy. However, without a positive cash flow, some companies may go out of business, like tech companies and start-ups.
The Next Five Years
Looking forward, it is expected that over the next five years, all private construction in the U.S. will decline due to a combination of upward wage pressure, inflationary costs, and higher interest rates. While data centers and warehouses have accounted for significant growth in the industry in the last few years, particularly due to Amazon’s expansion, it is expected to slow.
For the last 30 years, 65% of construction markets have underperformed the average. Twelve markets have dominated total construction spending, accounting for 30% of all costs, representing the largest cities in the U.S. Despite their spending power, many of these cities have experienced declining populations, including California, New York and Illinois, while Florida, Texas and Arizona have seen significant population growth.
Almost every industry in the U.S. is experiencing significant labor shortages. The construction industry has experienced stability with respect to its workforce, but wage inflation continues to prove challenging. Statistics also show that construction labor productivity has been declining over the last 15 years.
Many businesses are facing a rapid rate of retirements, with experienced mid-level managers leaving at a rate of over 10,000 employees per day. That brain drain means most new mid-level managers have not managed throughout an economic downturn.
As we head into an economic downturn, it is important for construction firms to have a clear and accurate value proposition, a rigorous project selection discipline, a firm client selection process and planned contingencies for different scenarios.