The current economic environment is uncertain. A volatile tariff strategy, elevated oil and gas prices, supply-chain disruptions and a rapidly changing technology landscape combine to create tremendous uncertainty for small business owners in the construction sector.
Supply chains have been unstable ever since the pandemic when demand changes, production challenges and labor shortages sowed chaos throughout the world. Since then, global conflicts, including in Eastern Europe and the Middle East, have combined to wreak havoc international shipping—with ongoing tensions, the fear is that more militant actors will emerge with the goal of disrupting global trade in search of profit.
The biggest risks to the economy come from rising inflation which could lead the Federal Reserve to raise interest rates. If rising energy costs and supply-chain disruptions lead to higher inflation, higher interest rates could follow, depressing growth and company earnings. Higher interest rates also depress asset prices and raise the cost of financing new projects which has a negative impact on the commercial real estate sector. Occupancy rates are also likely to suffer from any slowdown in economic growth, placing additional pressure on commercial real estate.
Tariffs
Tariffs have a significant impact on the construction industry and the cost of home construction in the United States, impacting businesses in the construction sector and making housing more expensive to maintain and improve for Americans. The largest expenditure when constructing housing is framing materials, primarily lumber and steel. The majority of the imported lumber used in U.S. home construction comes from Canada. The largest providers of steel to the U.S. are Canada, Mexico and Brazil.
Other major residential construction expenditures also rely heavily on imported products to meet demand. Concrete is sourced domestically, but also from Mexico. Roofing materials, siding, windows and doors can all be sourced domestically, but much of this supply currently comes from Canada and China. Many plumbing and electrical components are imported from China, Mexico, Germany and Canada, and many HVAC systems are imported from Mexico, China and South Korea.
Given President Trump’s commitment to maintain the use of tariffs as a point of leverage in his negotiations with foreign countries, and his willingness to reach for novel interpretations of existing trade law, it seems unlikely that he will abandon tariffs as an economic strategy. It is likely the President remains as committed to his tariff strategy today as he was when he entered office, and unlikely that small businesses are to see a significant drop in tariff rates during the Trump Administration without an act of Congress that defies the President’s wishes.
Small businesses should be keeping a close eye on changes to tariffs on the specific materials and countries that they import from. If a drop in tariffs does in fact occur, small businesses should have the capital lined up to finance the purchase of critical inventory at discounted prices. However, small businesses should also be prepared to continue managing their business without significant tariff relief and should explore opportunities to source more materials domestically.
Oil Prices
Volatile oil prices are yet another shock to operating margins that small businesses need to contend with. The construction industry has significant exposure to the petroleum markets given the heavy machinery used during the construction process and the building materials required in modern construction.
With oil prices climbing, small businesses are grappling with the impact of an unforeseen expense and agonizing over whether to pass these increased costs on to an already stretched customer base. Small businesses will likely delay raising prices as long as possible—similarly to when tariffs were first introduced—but that businesses will ultimately need to pass these expenses on to customers should prices remain elevated.
Consumer Spending
Inflation remains significantly above the annual targets set by the Federal Reserve, and most experts expect the recent declines to be temporary. If inflation continues to rise in the coming months, the Fed will come under increased pressure to raise interest rates, which will help slow inflation but will also slow economic growth. This could mean slower hiring and wage growth, which would in turn place pressure on consumer spending.
While inflation is impacting all consumers, it is not impacting all consumers equally. The economy is now K-shaped—the wealthy minority drive growth in consumer spending. Older generations of Americans with real estate and investment portfolios have continued to prosper as rising home prices and financial markets fueled wealth accumulation, while younger Americans—those currently saving for a home and retirement—saw these goals slip further from reach. The result is a bifurcation of the market, with one set of consumers focused on luxury and the other stretching every dollar. In this environment, contractors are struggling to identify their core customer and position their offerings appropriately.
Navigating Growth in an Uncertain Economy
Over the past several years, small construction businesses have become all too adept at managing through crises. Many have learned the hard way the importance of keeping a close eye on margins, managing supply chains and cost of goods sold, and developing products that appeal to cost-conscious consumers. Successful businesses today maintain options in their supply chain, their headcount and in their access to capital. Many businesses today are investing in automation as a way to control more of their supply chain and reduce dependency on human capital. With recent advances in AI, many businesses are now adopting AI tools that help them connect with and manage customers, handle accounting and business analytics, and even develop software.
Successful businesses also maintain multiple financial relationships capable of providing working capital to fund growth. Many also finance equipment purchases and maintain revolving lines of credit to manage the volatility of cashflows month to month. It is important for small businesses to maintain both bank and non-bank relationships to ensure access to a full suite of financial products.
SEE ALSO: PLANNING SMALL COMMERCIAL SPACES FOR FASTER APPROVALS AND FEWER REVISIONS
