The Economist: Construction and COVID

Every industry has been impacted by the pandemic, though obviously to varying degrees. In construction, work substantially slowed in most segments in 2020, although housing (buoyed by historically low mortgage rates) was one relative bright spot. Many contractors faced delayed or cancelled projects due to lower economic activity and uncertainty. According to a survey from the Associated General Contractors of America (AGC), 44% of contractors had at least one project cancelled and 59% had projects postponed to 2021. Many of those initiatives remain in limbo. Overall volume was down about 16% in 2020. While there are small signs of confidence increasing as the path forward becomes somewhat clearer, it remains uncertain when or even whether demand will improve this year.

A number of factors caused contractors to struggle during the lean months in the spring of 2020. Increased competition for the few available projects led many to reduce bids to secure sustainable work. The additional costs associated with COVID-19, including safety equipment and other protocols, also reduced profitability. Simultaneously, the cost of materials escalated due to shortages and bottlenecks, causing still further pressure. As examples, the cost of steel increased by 9.3% and lumber by a staggering 52% during 2020.

The greatest obstacle to construction achieving a robust recovery, however, is the labor market. The industry was facing a marked worker shortage before the pandemic. An initial surge of project cancellations and material shortages caused nearly 40% of companies to lay off workers. In the intervening months, some workers have been unwilling to return because of health concerns or finding employment elsewhere. Furthermore, even as some companies consider hiring new workers, they are struggling to find skilled labor despite higher unemployment rates, as there is less worker migration because of COVID-19.

Construction is a barometer and often a leading indicator for broader economic activity, and the state of various components of commercial construction reflects the health of the underlying industries. According to the AGC, contractors are expecting most non-residential construction sectors (including retail, lodging, and higher education) to contract in 2021, while only a few (alternative health care facilities, warehouses, and water and sewage facilities) are expected to experience modest gains.

Construction both responds to and supports economic growth, providing the infrastructure needed to facilitate expansion. It can be described as the sector that builds the boxes containing ongoing business activity. Its health is related to that of the economy, which is, in turn, heavily dependent on the future path of the virus. Assuming the progress in vaccinations and therapeutics allows the emergence of a new normal later this year, there is every prospect of a vigorous comeback. Otherwise, that path will be more onerous. Stay safe.

Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group (www.perrymangroup.com), which has served the needs of over 2,500 clients over the past four decades.