2021 State of the Economy: Positive vibes

Construction activity

Given healthy corporate growth, it’s little wonder that business investment remains robust.

“Our members in general are expanding, building new warehouses and manufacturing facilities and buying new equipment,” Palisin says. “We are seeing a special uptick in the automation category because of the labor supply issue.”

Nationwide, the picture is the same. Moody’s Analytics expects capital investment to increase 8.2 percent for both 2021 and 2022, another welcome rebound from the 5.4 percent decline of 2020. Companies are giving a lot of attention to bolstering their intellectual property infrastructure.

“Investments in information processing equipment and software is well above its pre-pandemic level as businesses have boosted their IT budgets,” Yaros says.

Higher energy prices have also fueled aggressive investments in mining exploration, shafts and well structures. The economy should also benefit from more spending on commercial structures.

“We’re going to see more nonresidential construction next year,” says Bill Conerly, principal of his own consulting firm in Lake Oswego, Oregon. “It will be strongest probably in warehouses and light industrial, but also suburban offices. Early indicators, like the Architectural Billings Index, are looking positive.”

This will be a welcome change over recent flat activity, which Conerly attributes to the long lead times characteristic of such projects, and a scarcity of new initiatives in the early days of the pandemic.

“Early in 2020, nobody was signing papers to acquire land or do new projects,” he says. “So what we see going on now are projects that were planned pre-pandemic or with short lead times.”

Fueling the trend: Ready money.

“For the most part, our companies are able to access funds for hard capital investments and lines of credit,” Palisin says. “Financing has loosened up since a year ago when everybody was in a high state of uncertainty.”

On the residential side, housing starts have been running about 20 percent higher than pre-pandemic levels, according to Moody’s Analytics. The prediction is for full steam ahead.

“Annual growth in housing starts will remain strong because of favorable demand-side factors, namely demographics and excess savings,” Yaros says.

Increases for 2022 are expected to top 12.9 percent – very aggressive by historical standards and only lower than the previous year’s 15.3 percent increase because of temporary supply shortages.

Eager consumers are bidding up the prices of single-family homes, and a general easing of mortgage lending standards is helping grease the skids. Housing prices for 2021 are expected to jump 15.6 percent – a considerable improvement over the previous year’s 9.8 percent. As for 2022, Moody’s Analytics expects increases to decelerate to 1.4 percent, thanks to difficult year-to-year comparisons.

Scarce workers

The generally favorable economic forecast is not without its clouds. As most employers will attest, today’s ambitious hiring initiatives are colliding with a scarcity of candidates.

“Our members are having difficulty finding enough workers, especially for entry-level jobs,” Palisin says. “The average time-to-hire has doubled from what it was prior to the pandemic. This will certainly impact our members’ ability to take on new work or provide on-time delivery.”

Nationwide job openings recently topped a record-shattering 11 million – a huge increase over the 7 million pre-pandemic level.

“The No. 1 concern of businesses going forward will be finding qualified labor,” Yaros says. “There have never been so many open positions across every industry and government, but the need for more workers is especially acute in manufacturing, transportation, educational services, healthcare, and leisure and hospitality.”

The reasons behind the scarcity are diverse.

“There has been a significant drop off in labor force participation as folks were forced into retirement or are staying home to deal with childcare or other dependent care issues that are more difficult to handle in the current environment,” Hoyt says.

Some fear the risk of workplace infections. Others are not finding exactly the job they want. And many pandemic-shocked people are reassessing their life missions and pursuing new ventures.

A number of factors may help relieve the labor crisis in 2022. These include the end of bonus unemployment insurance, a declining effect from stimulus payments, an abatement of infections and a return to in-person schooling.

Supply chains

The tight labor market is helping fuel another business headache: a global breakdown in the efficient distribution of goods.

“Most of the time, the root cause of supply chain disruption is a lack of sufficient workers,” Conerly says.

When people aren’t available to do the work, efficient production and transportation fall by the wayside. Cargo ships are piling up at ports, causing delivery delays and leading to widespread price increases for supplies.

The supply chain imbroglio has engaged a broad spectrum of industries.

“Close to 95 percent of our members are experiencing supply chain issues,” says Megan Tanel, senior vice president of the construction sector for the Association of Equipment Manufacturers. “More than half say the issues are getting worse. There are transportation bottlenecks, materials and component shortages. For the vast majority of our members, these issues are both domestic and global. And they are causing huge constraints on production.”

The increased costs resulting from order backlogs and delivery delays are only exacerbated by the China tariffs. While businesses were expecting some relief from the Biden administration, so far there has been no move to change the status quo.

“Tariffs on Chinese goods will likely continue,” Conerly says. “In fact, given the friction between the U.S. and China, it’s possible we could even get additional ones.”

The double whammy of supply chain disruption and China tariffs are causing some businesses to look at alternative regional or local sources.

“Many businesses are no longer relying on any single supplier or global region for goods and services,” says John Manzella, a consultant on global business and economic trends. “They are building more diversified and reliable supply chains. Instead of buying in scale from two very large Chinese suppliers, they might buy in smaller increments from a half dozen suppliers located in different regions of the world. They may also utilize more long-term warehousing facilities. This strategy, which adds costs but reduces risk, will be extremely beneficial in protecting against the next pandemic, black swan or trade war.”

The year ahead

As businesses enter the early months of 2022, economists suggest watching a number of leading indicators for an idea of how the year will go. The first is the state of consumer confidence – a vital driver of the nation’s economy.

Given favorable wages and income trends, one might expect that consumers are feeling fairly good. In the closing months of 2021, though, the attitude of the American public was surprisingly unsettled.

“It really is difficult to get a good sense of consumer confidence in the current environment,” Hoyt says.

One reason, of course, is the unclear path of the pandemic. But another is the recent spike in fuel prices, sparking fears of inflation.

How the public reacts to the shape-shifting virus should be more apparent in the opening months of 2022. So should changes in the currency’s purchasing power.

“Inflation will be the key financial statistic to follow early in the year,” Yaros says.

Yet another leading indicator will be the return-to-work trend.

“More people getting back on the job would confirm a strong 2022,” Conerly says. “Are employers getting the workers they need? Are people earning more money to spend?”

Finally, a nonfinancial force may be more important than anything else.

“The damage done by the delta variant has taught us that the pandemic is still alive and has the potential to disrupt economic activity,” Hoyt says. “Early in 2022, the leading data will be about COVID-19. What are the trends in vaccination rates? Infections? Hospitalizations? Deaths?”

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