December 1, 2021

Inflation, Labor Shortages Weigh Down Construction Industry in Third Quarter, Finds Marcum Index

Inflation, Labor Shortages Weigh Down Construction Industry in Third Quarter, Finds Marcum Index Construction

DECEMBER 1, 2021 (New York City, NY) – The Marcum Commercial Construction Index for the third quarter of 2021 reports that the construction industry’s recovery slowed during the summer in the face of labor shortages and rising material prices. Nonresidential construction spending remains 10.7 percent below January 2020 levels but is just 1.3 lower than it was one-year ago.

The index is produced by Marcum’s National Construction Services group.

“The nonresidential construction segment added 33,000 net new jobs in October 2021 and supports 46,500 more jobs than it did in October 2020,” said Anirban Basu, Marcum’s chief construction economist and author of the report. “But a majority of that growth has occurred in the heavy and civil engineering sub-segment, which is largely fueled by public financing. Nonresidential building employment, which is largely supported by private investment, is up only 4,700 positions over the past year.”

Dr. Basu points out that, as has been the case since the beginning of the pandemic, the residential sector continues to outpace nonresidential. “Residential construction employment has outpaced nonresidential job growth since the start of the pandemic. Of the 169,000 jobs the construction industry has added since October 2020, the residential sector accounted for 122,800 (72.6 percent) of them,” he said.

The recovery in construction employment has not occurred evenly across the country. “Among the 20 largest metro areas in the U.S., the four with the greatest construction employment growth since the start of the pandemic – Minneapolis, Detroit, Chicago, and St. Louis – are all located in the Midwest. Aside from Houston, which has experienced the steepest employment decline in large measure because of dislocations in the energy sector, coastal MSAs like New York, Los Angeles, and San Francisco have fared the worst. These were among the communities most extensively shutdown during the pandemic’s early stages,” said Dr. Basu.

Inflation and sluggish supply chains continue to be issues for both the construction industry and broader economy. “The recent surge in energy prices strongly suggests that contractors, consumers, and other economic actors will be wrestling with inflationary pressures for much of 2022, and this trend is evident in the most recent Producer Price Index data which indicate that nonresidential construction input prices increased 20.2 percent from September 2020 to September 2021,” said Dr. Basu.

Dr. Basu is optimistic about the construction industry but warns that current conditions may suppress contractor profit margins. “Most contractors remain very busy,” said Dr. Basu. “Demand for construction services remains high. The primary issues relate to rising costs, materials shortages, and worker shortages. Thus, while the average contractor expects sales and employment to rise over the next six months, profit margins are expected to decline.”

Marcum’s national construction leader, Joseph Natarelli, said, “Prices are continuing to rise for materials, and the labor shortage is causing timing issues as well as increased overall costs to employ people. We strongly urge contractors to lock in material purchases for future projects further out than they normally would, in an effort to curb delays as much as possible. It is also important to account for these increased costs in future bids in order to limit further gross profit deterioration.”

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About Marcum Construction Services
One of the leading construction accounting firms in the U.S., Marcum LLP’s Construction Services group provides audit, consulting, and taxation services to clients ranging from start-ups to multi-billion-dollar enterprises. The group’s professionals, among the country’s foremost experts in construction accounting, are frequent industry authors and speakers and serve as technical reviewers for the AICPA’s construction audit and taxation guides. Marcum’s construction group also publishes several definitive industry resources – including the annual Marcum National Construction Survey, the quarterly Marcum Commercial Construction Index, the Marcum PAS Contractor Compensation Quarterly, and the annual Marcum JOLTS Analysis of construction employment trends – and presents an ongoing series of industry summits and technical webinars focused on the unique needs of construction contractors.

About Marcum LLP
Marcum LLP is a top-ranked national accounting and advisory firm dedicated to helping entrepreneurial, middle-market companies and high net worth individuals achieve their goals. Marcum’s industry-focused practices offer deep insight and specialized services to privately held and publicly registered companies, and nonprofit and social sector organizations. The Firm also provides a full complement of technology, wealth management, and executive search and staffing services. Headquartered in New York City, Marcum has offices in major business markets across the U.S. and select international locations. #AskMarcum.