Materials Prices Won’t Drop as Much as Expected
Prices for lumber, rebar, structural shapes and many more components essential to keeping construction moving along remain elevated. S&P Global Market Intelligence (GMI; formerly IHS Markit) predicts that softwood lumber will drop 14.6% this year after jumping 41.9% in 2021; that’s about half the decline they projected as of the fourth quarter. Pandemic-related supply issues have subsided somewhat, but weather-related problems persist. Lumber is not reaching buyers in a timely fashion, which ENR reports creates panic buying, which then leads to even higher prices. Plywood is on a similar path, with prices expected to drop 17.8% this year compared to the 30.6% drop previously expected. The Russian invasion of Ukraine will have significant impact on some sectors, with GMI predicting a 22.1% increase for rebar and a 20% jump for structural shapes.
Construction Industry Confidence Steady
ENR’s Construction Industry Confidence Index remained steady in the first quarter, rising one point to 61. The index measures executive sentiment about where the market will be in the next three to six months and over a period of 12 to 18 months. Surveys were done between February 7 and March 14. The Economic Confidence portion of the index has dropped 34.3% since the second quarter of 2021. Only 19.8% of respondents thought the economy would improve in the next three to six months; 35.2% predict a decline. However, over a three-year period 42.6% see an improving economy and just 17.9% see a decline. Almost three-quarters of all respondents are three to five times more concerned about labor shortages than supplies or costs. ENR says it’s primarily skilled workers who are in short supply. The skilled worker shortage is being driven by retirements, slowing immigration and more aggressive enforcement of existing laws related to undocumented workers. Russia’s disruption of the global energy market does not seem to have impacted confidence yet.
Red Hot Housing Market Cooling Off
Mortgage rates have risen above 5% for the first time in more than a decade. Rates climbed from 4% to more than 5% in just five weeks as the Fed began aggressively raising rates in order to tame inflation and cool off the housing market. Demand has been exceeding supply to such an extent that in many areas homes are only on the market for a few days and go for as much as 40% over ask. Buyers are lowering their expectations, adopting more flexible attitudes about where they want to live and in what kind of home, waiving inspections and often buying sight unseen. Assuming the Fed continues to raise rates, mortgage rates, which are tied to the yield of Treasury Notes, will continue to rise as well, which means people will be able to buy less home for their money and existing homeowners who want to trade up or relocate have less of an incentive to sell. Housing analysts don’t think home prices will actually drop. Rather appreciation will return to more normal levels of 3% a year compared to the 20%+ increase in property values last year. In some markets in the South, year-over-year prices are up nearly 40%.
Is the US Headed for a Recession?
Outlooks and forecasts vary widely, but forecasters agree that depends on the Fed’s ability to slow down growth without sending the economy into a tailspin. Harvard economist and former Treasury Secretary and top Obama advisor Larry Summers was the first to caution about the downside risks of the American Rescue Plan. The $1.9 trillion spending package pumped so much money into the economy it drove up the savings rate. As the worst of the pandemic waned, demand bounced back much sooner and more vigorously than expected, exacerbating supply chain problems and labor shortages. The Fed believed inflation would subside on its own but relentless demand coupled with further disruptions to the global supply chain caused by war on Ukraine have pushed consumer price inflation to levels not seen in decades. Fidelity’s research team doesn’t believe that a recession is imminent, but also thinks that the Fed’s plans to continue to raise rates at a faster pace than usual poses a risk of a slowdown sometime in 2023. Summers puts the odds of a downturn in the next two years at about 66%. Fed Chair Jerome Powell confirmed the Fed is now focused on taming inflation and indicated that a half-point increase in interest rates was on the table for early May.
FOMO Drives Behavior
FOMO (Fear of Missing Out) has gone mainstream, with newscasters casually blaming FOMO for people’s often irrational behavior as they attempt to cope with rising prices, housing shortages, retail stock turnover, supply chain issues and more. FOMO as a behavioral driver was first identified in 1996 by marketing strategist Dr. Dan Herman but the term FOMO was coined in 2004 by Harvard Business School student Patrick McGinnis, who wrote about it in the Humor section of The Harbus (HBS’s magazine). A study in 2020 by Washington State University psychologist Chris Barry found that FOMO was triggering behavior at all levels. It’s such a commonly employed tactic by scammers that the SEC recently warned consumers about investment scams that prey on people’s fear of missing out on a big opportunity. Shortages, out of stocks and empty shelves trigger FOMO and cause people to buy on impulse, hoard and buy more than they need “just in case.” There’s a lot of FOMO going on in the housing market now as people desperate to find a new home buy properties sight unseen, waive inspections, pay cash and pay significantly over list. Rising interest rates also trigger FOMO; people want to find a home and lock in a rate they can live with before rising interest rates price them out of their dreams.
Online Retail Sales Forecast
Global ecommerce will grow significantly faster than store-based commerce, according to the annual Future of the Digital Shelf report from Edge by Ascential. The study projects that online worldwide ecommerce sales will reach $2.4 trillion in gross merchandise value (GMV, or total value of goods sold) in 2026. That would mean that ecommerce would account for nearly 40% of global retail sales by 2026 and store-based retail would fall from 69% of total sales to just 60%. In addition, from 2021 through 2026, Edge by Ascential expects ecommerce to make up 63% of all total GMV growth, outpacing every other retail channel. During the pandemic in 2020, ecommerce activity jumped by 37% worldwide. Other findings show that clients can lose 22% or more of their weekly sales for every day their product is out of stock. Search is now the preferred way to shop and the entry point for finding products and brands. For products sold online, a detail page describing the product and showing packaging are just as critical as in the physical world. Adobe recently predicted that online retail sales will surpass $1 trillion this year for the first time, with some of that big jump being fueled by inflation.
March Online Spending Grows 7%
Online spending and online prices have been rising for 22 consecutive months. Consumers spent $83.1 billion online in March, a 7% year-over-year increase from stimulus-fueled spending in March 2021, and up from $67 billion in February, according to Adobe’s Digital Price Index (DPI). Fourteen of the 18 categories tracked by the DPI had price increases. Consumers paid $2.8 billion more for the same amount of goods in March, when online prices rose 3.6% year over year and 0.3% from February. Consumers received 3.1 billion out-of-stock messages in March, up from 2.8 billion in February, which had three fewer days. Adobe reported that ongoing demand despite fewer choices and more out-of-stocks is an indication that shoppers are getting more comfortable with product substitutions.
Finding a New Normal at Work
Can work provide the best of both worlds? After two years of learning how to adapt to teleconferences, zoom meetings, social distancing and dealing with the impact of CV19 and all its variants, now construction and design firms are trying to adapt to the latest challenge: safely returning employees to the office in a way that keeps some of the benefits of working remotely. Studies show that the number of employees spending at least some time in the office doubled in the first quarter. Training, employee development, mentoring and creative collaboration were more challenging in a remote world. It turned out that for many employees, the people they worked with were a big part of what they liked about their job. But remote work offered benefits and options to people dealing with childcare, health and safety issues and other concerns that are hard to give up.
Many firms are moving to a hybrid work environment that offers some degree of in-person work for most employees while retaining some of the flexibility that kept people working during the pandemic. Companies are bringing people into the office for collaborations, team meetings, creative sessions and other activities better done in person. Some of the hybrid evolution is being driven by the tight labor market that puts employees in the driver’s seat. But many companies also discovered that being flexible and accommodating to employees while making sure that team members are available when needed works better for everyone.
Many firms are offering incentives such as onsite events and other perks to people returning to the office and are willing to be more flexible about working from home and other options that are more accommodating to the needs of employees. Some senior executives have reported that conservative firms and managers who pre-pandemic would not have even considered a remote or hybrid environment were forced to change and gradually came to first accept and now embrace the new and more flexible normal.
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