It was a beautiful setup for a rapid economic recovery. During the worst of the pandemic, the federal government injected trillions of dollars in fiscal relief into the economy. Assistance took many forms, including stepped-up unemployment benefits as an inducement to keep more people at home, direct payments, as well as loans and grants for businesses.

Unable to spend on a variety of customary items during the worst of the pandemic—items ranging from movie theaters to vacations in Honolulu—American households amassed massive savings. By April 2021, Americans had saved $2.6 trillion above and beyond what they would have saved but for the pandemic.

The notion had been that as the economy reopened, the quantity of goods supplied would gradually rise to meet the quantity demanded. This would translate into a crescendo of transactional activity, producing a level of economic vibrancy seldom observed in America or anywhere else. This dynamic would translate into booming retail sales, relentless and rapid employment growth, in addition to growing confidence among leaders of households and businesses alike.

For construction, the effects would be simply magical. While the economy took off, Federal Reserve policy would remain accommodative. The combination of liquidity infusions, incredibly low interest rates and rapid economic growth would trigger a massive uptick in real estate values, expand federal, state and local government tax collections, as well as a surge in demand for construction services.

Alas, it was not meant to be. The delta variant snuffed out what would have been an incredibly dynamic economy in many ways. First, it curtailed demand expression. One of the pandemic’s lessons is that consumers don’t necessarily need to be told to stay at home; rising infection rates are enough to persuade some Americans to partially withdraw from the economy, whether by dining out less or postponing a vacation.

But the far greater impact has been on the economy’s supply side. The pandemic has rattled global supply chains by further reducing workforce availability and occasionally triggering economic lockdowns. In Malaysia and Vietnam, for instance, two nations integral to U.S. supply chains, lockdown measures have wreaked havoc on imports.

In China, government officials suspended one of the terminals at the world’s third-largest cargo port because of a single infection of a port employee. The shutdown is expected to inflict more pain on the global economy as the quantity supplied of goods continues to fall short of quantity demanded, including during the holiday shopping season.

The result has been a proliferation of input shortages and sky-high prices. Few economic actors are as aware of such dynamics as construction contractors, who have watched lumber, copper, steel, aluminum and other input prices skyrocket over the period of pandemic.

During a recent 12-month period, the aggregate price of inputs to construction climbed nearly 21%. Among the categories that experienced the most profound increases were natural gas and steel.

While the price of softwood lumber, a primary input to residential construction, dominated industry headlines after prices rose precipitously through the pandemic’s initial year, inflationary pressures have been widespread and persistent across many residential and nonresidential input categories. Softwood lumber prices surged nearly 150% between February 2020 and May 2021. After several months of decline, lumber prices began to rebound during the late summer and into the fall. Among the other categories that have experienced profound input price increases over the course of the pandemic are steel mill products, iron/steel, copper wire, natural gas and a variety of unprocessed energy materials (e.g., crude oil).

Certain commodity prices have both declined and risen over the course of the pandemic, but the combined result is still much higher prices than prevailed pre-pandemic. Iron and steel prices initially declined from February to August 2020, but have since approximately doubled.

On top of rising materials prices, the cost of transporting them has skyrocketed. The most recent reading of the Baltic Dry Index, which benchmarks the price of moving raw materials by sea, was up 1,150% compared to February 2020. Because the United States remains the leading importer of raw materials, this disproportionately challenges enterprise.

While the dislocating impacts of the delta variant on supply chains are partly to blame, there are several forces at work. With vaccination rates climbing globally, demand has begun to express itself more forcefully, driving prices higher and creating more shortages.

Price increases, however, are not the only negative impact of snarled supply chains. In August, 17% of Associated Builders and Contractors members who participated in a survey said their work had at some point been interrupted due to difficulty securing inputs. Project delays abound. And with China, the world’s biggest exporter, facing an energy crisis that has forced certain producers to further curb production, supply chain issues are set to persist well into 2022 and beyond.

Combined with rising labor costs, the result has been rapidly rising costs of construction services. In some instances, project owners bit the proverbial bullet, paying more for projects in a rush to get them completed. Some projects have to get done, whether in data center, flood control or healthcare categories.

In other instances, projects have been postponed, interrupting what had been growing backlog and the formation of substantial confidence in the U.S. nonresidential construction industry. Indeed, the recent spate of project postponements and occasional cancellations has caused industry backlog to dip according to certain surveys, including ABC’s Construction Backlog Indicator.

These issues are hardly unique to the nation’s construction industry. An array of industries, including auto manufacturing, video game production, appliance manufacturing, airlines, shipping, trucking and many others have experienced disruption due to ongoing supply chain disruptions and a lack of available labor.

As is often the case, many economists have been surprised by the madness and mayhem. Earlier this year, the Federal Reserve and many other economists believed that supply chain disruptions and attendant inflation would be merely temporary. But if anything, supply chain issues have worsened over the course of the year, with the belligerent delta variant largely to blame.

Over the course of months, a growing number of economists have questioned whether and to what extent observed inflation is merely transitory. Between August 2020 and August 2021, consumer prices rose 5.3%, according to the Consumer Price Index. The notion had been that by the latter stages of 2021, global supply chains would have become more orderly, setting the stage for a return to normalcy.

Certain aspects of currently observed inflation are likely to be transitory. Economists like to say that “the cure for high prices is high prices.” The notion is simple: Elevated prices truncate quantity demanded while also bolstering the incentive to increase quantity supplied to markets. In the short-term, producers respond by adding shifts or increasing capacity utilization at factories. In the longer-term, suppliers are induced by the allure of high prices and attendant profit margin expansion to increase capacity, which creates a decline in prices as supply expands.

Adding capacity takes time, whether that capacity is housed in sawmills, semiconductor manufacturing plants or on oil fields. This is especially true in the context of ongoing labor shortages, with the U.S. labor force participation rate stuck at a lowly 61.7% for many months.

There were many who believed that the cessation of stepped-up federal unemployment insurance benefits would lead to an avalanche of people re-entering the labor market. Even before Sept. 6, the date on which those stepped-up federal benefits lapsed, economists knew that such an avalanche would not be forthcoming.

Twenty-six governors opted out of pandemic-era programs several weeks prior to their official expiration on Labor Day in 2021. According to a paper authored by economists and researchers at Harvard, Columbia, the University of Massachusetts Amherst and the University of Toronto, no surge in participation occurred in those states. As reported by CNBC, the researchers compared individuals in 19 states that withdrew federal benefits in June against those in 23 states that maintained them through the federal termination date. The study found that the effect of early termination was merely modest, and only one in eight unemployed individuals in the “cutoff states” found a job during that period. In the final analysis, the research indicates that enhanced unemployment benefits are a small, but incomplete explanation for hiring challenges. There are many other explanations, including fear of both immunization and infection, a lack of available/affordable daycare and a desire among many to only offer their services remotely.

These labor market shortages have been particularly severe in construction. In July 2021, 4.2% of construction jobs were unfilled. This would have been the highest rate of unfilled construction jobs between 2001 (when the BLS began tracking it) and early 2019, a year during which construction shortages were especially severe. There are, as of July 2021, 321,000 unfilled construction jobs, the highest level ever observed for that period.

As if supply chain distortions and problematic labor market dynamics were not enough, policymaking in Washington, D.C., has been confused and puzzling. For months, a bipartisan infrastructure bill raced through committee hearings. Passage of the bill, which would supply $550 billion in additional infrastructure investment, in addition to that which has already been planned, was a sure thing until it stalled in political machinations.

The result has been a slowing of nonresidential construction’s forward momentum. ABC’s Construction Backlog Indicator hit the brakes in August 2021, falling to 7.7 months, the lowest reading since January. This sudden decline followed a period of steady backlog recovery that persisted from November 2020 to July 2021. Contractor confidence also fell in August 2021 according to ABC’s Construction Confidence Index, with labor and input shortages along with rising costs putting more projects on hold and in some cases rendering them financially unfeasible.

This decline in backlog coincides with weak nonresidential construction spending data. As of August 2021, construction spending was below February 2020 levels in all but two nonresidential segments. In total, nonresidential spending was 10.7% lower than in February 2020 and certain segments—such as lodging, which is down nearly 45%—have been devastated since the beginning of the pandemic.

Despite all the bad news and some diminishing of contractor confidence, all three ABC Construction Confidence Index measurements remained above the threshold reading of 50 in August. That implies that contractors still collectively expect sales, staffing and profit margins to expand over the next several months despite myriad and obvious challenges.

STILL, RECOVERY PERSISTS

In March and April 2020, the U.S. economy lost 22.4 million jobs, erasing gains that America had managed over the prior 113 months. Rapid recovery commenced in May 2020 and, despite multiple viral surges and a brief period of jobs loss in December 2020, the recovery has persisted.

During 2021’s initial three months, the nation added 1.5 million jobs. The nation’s rate of unemployment, which attained a cyclical peak of 14.8% in April 2020, had declined to 6.3% by 2021’s initial month. The expectation was that by 2021’s latter stages, the economy would be humming.

By some measures, it has been. As of July, there were 10.9 million, available unfilled jobs in America. Recently, there have been in the range of 100 jobs openings for every 83 unemployed people. The issue has not been labor demand, it has been labor supply. While there have been some solid months of job growth, there have also been some deeply disappointing months, and the general sentiment is that too few employers have been able to fully staff their businesses.

The result is that the inability of supply to fully meet demand has produced many negative economic outcomes. Among them was softer economic growth during 2021’s third quarter, incomplete recovery in the labor market, elevated inflationary pressures, larger numbers of ongoing business failures and a longer wait to complete recovery. Although, by 2021’s second quarter, U.S. gross domestic product had recovered to its pre-pandemic level, complete recovery remains elusive in many other categories, including national employment, construction employment and nonresidential construction spending.

With so much federal government stimulus now in the history books and with the Federal Reserve readying itself to tighten monetary policy, many may wonder how vigorous the recovery will be in 2022. The response is that stimulus persists, and that 2022 will be associated with ongoing reopening of the global economy. By themselves, those factors suggest that 2022 will be another year of economic growth.

There’s more. While convention suggests that state and local government finances were harmed by the pandemic, that is largely not the case. By July 2020, state and local government tax receipts were higher than their pre-pandemic peak. On March 11, 2021, President Joe Biden signed the American Rescue Plan Act of 2021, which allocated $350 billion in relief to state and local governments. The upshot is that state and local government spending will be a primary driver of economic activity in 2022, and some of that money will be spent on the procurement of construction services, including significantly magnified school construction. As this comes to fruition, public sector construction spending, which fell roughly 9% from March 2020 to August 2021, should rebound.

LOOKING AHEAD

After the dramatic pace of economic recovery that characterized 2020’s final eight months and the early months of 2021, economic growth is set to soften in 2022. While recession appears unlikely in the near-term, there are many factors suggesting that the year to come will not produce a further boom in activity.

Among these are:

1. Less growth in federal spending;
2. Ongoing global supply chain disruptions; and
3. Rampant worker shortages.

While there may be some alleviation of the challenges produced by the latter two factors, the economy will continue to face substantial headwinds.

With so much going on, it is simple to forget what really matters. More than anything else, economic activity is driven by flows of capital. That capital could become more expensive in 2022 as monetary policy shifts, producing likely increases in interest rates in the process. With so many economic actors so fully leveraged, even small increases in interest rates can produce substantial drag on the economy. A sudden surge in borrowing costs could be enough to throw the 2022 economy into reverse, though such a surge appears unlikely. Still, contractors and other construction industry stakeholders should be eyeing interest rates closely over the year to come.