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ABC: Construction backlogs, input prices up; contractor confidence down

By |  June 15, 2022
Photo: P&Q Staff

The Associated Builders & Contractors (ABC) report its Construction Backlog Indicator was up in May, while its Construction Confidence Index was down. Photo: P&Q Staff

The Associated Builders & Contractors (ABC) says its Construction Backlog Indicator increased to nine months in May from 8.8 months in April, according to an ABC member survey conducted May 17 to June 3.

The reading is up one month year-over-year from May 2021.

Infrastructure backlog jumped from 8.7 months in April to 9.3 months in May, and the Northeast and South regions continue to outperform the Middle States and the West. Contractors with more than $100 million in annual revenues enjoyed the highest backlog, at 13.2 months.

ABC’s Construction Confidence Index readings for sales, profit margins and staffing levels declined in May. The indices for sales and staffing remain above the threshold of 50, indicating expectations of growth over the next six months, while the reading for profit margins was exactly 50 for the month.

“It is simply remarkable that contractors continue to add to backlog amidst global strife, rising materials prices and ubiquitous labor force challenges,” says Anirban Basu, ABC’s chief economist. “Backlog is up in every segment over the past year, including in the somewhat shaky commercial category. The largest increase in backlog has been registered in the industrial segment. More American companies are committing to place additional supply chain capacity in the United States, with Intel and Ford representing particularly recent and noteworthy examples.”

Basu adds that the challenge for contractors will continue to be the cost of delivering construction services.

“The risk of severe increases in costs and substantial delays in delivery remains elevated given the volatility in input prices, the propensity of the labor force to shift jobs in large numbers and equipment shortages and delays,” he says. “This ABC survey indicates that the proportion of contractors who expect that profit margins will expand over the next six months is declining, a reflection of lingering, worsening supply chain challenges.”

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Construction input prices

Construction input prices rose 2.3 percent in May compared to the previous month, according to an ABC analysis of U.S. Bureau of Labor Statistics Producer Price Index data. Nonresidential construction input prices also increased 2.3 percent for the month.

Construction input prices are up 21.4 percent from May 2021, while nonresidential construction input prices are 21.9 percent higher year-over-year.

Input prices rose in 10 of 11 subcategories in May. The largest price increases were in natural gas (39.7 percent) and unprocessed energy materials (16.3 percent).

“Inflationary pressures show no signs of abating,” Basu says. “For months, economists and others have been expecting inflation to peak and then subside. Instead, the Russia-Ukraine war has disturbed markets, driving energy prices higher. Those elevated energy prices are now circulating across the economy, affecting manufacturing and distribution, and there is little prospect for inflation to meaningfully subside during the weeks ahead.”

Basu adds that actions taken by the Federal Reserve will play a large part at what inflation will look like the rest of this year.

“Federal Reserve policymakers will continue to aggressively combat inflationary pressures,” he says. “But what the Federal Reserve most directly affects is demand for goods and services, not supply. By tightening monetary policy and raising interest rates, the Federal Reserve will suppress demand over the rest of the year. Eventually, suppliers will respond to diminished demand. This dynamic will quite likely drive the economy into recession either later this year or at some point in 2023.”

Despite a recession potentially being on the doorstep, Basu says struggles for contractors may not stop after 2023.

“Based on the historical lag between the performance of the economy and nonresidential construction spending, more difficult times could be ahead for contractors in 2024 or 2025,” he says. “Looking at the most recent reading of ABC’s Construction Confidence Index, contractors are already seeing momentum slow. The likely exception is public contractors, who will continue to benefit from stepped-up infrastructure spending.”

Jack Kopanski

About the Author:

Jack Kopanski is the Managing Editor for Pit & Quarry and Portable Plants. Kopanski can be reached at 216-706-3756 or jkopanski@northcoastmedia.net.

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