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On-Demand: Construction | Economics, Industry Outlook, and Trends

Dec 8, 2021

In Part I of this webinar series, join EisnerAmper and Cumming Group to discuss the current and future outlook of the construction industry.


Barry Watson:Hello and thank you for joining us today. In part one of a two-part mini-series for businesses and personnel that serve in our construction industry. My name is Barry Watson. I'm a CPA audit director here in the Dallas, Texas office of EisnerAmper.

EisnerAmper is one of the largest accounting, tax and business advisory firms in the United States with more than 2000 employees and over 200 partners across the country. Our professionals serve our clients diligently in many industries, including commercial and construction real estate. I will be a host and moderator today in which we will cover a current economic update. I hope that you'll rejoin us in part two of this series that we'll discuss in a round table format, current issues, market issues, and trends within the construction industry. I'm joined today by Mr. Daniel Pomfrett, Vice President of Cumming Group and Dr. Anirban Basu, Chairman, CEO and Chief Economist with Sage Policy Group.

Daniel offices his with his company in the greater Chicago area, joining the company back in 2013. Cumming Group is a multifaceted consulting firm comprising of 1100 people with 41 offices worldwide. Cumming Group serves as a devout advocate for its project management and cost consulting clients by solving problems, driving solutions and delivering results. Dr. Basu resides in Baltimore, Maryland, and was appointed in 2014 by then Maryland governor Larry Hogan as chairman of the Maryland Economic Development Commission in which he continues in that role today.

In addition, Dr. Basu teaches global strategy at John Hopkins University and serves as a chief economist function for a number of organizations around the country. He's been twice recognized as one of Maryland's 50 most influential people and has been also named Baltimore region's 20 most powerful business leaders. Today, Dr. Basu will guide us through a presentation of the current economic state in the US and afterwards we'll have a question and answer dialogue with the panelists over some key topics the industry finds itself dealing with these days. Gentlemen, I want to thank you both for taking time out of your busy schedules to join us today. Dr. Basu, I'll turn the webinar over to you with your presentation, take it away.

Anirban Basu:Right. Thank you very much, Barry, for the opportunity to be with you and all of your stakeholders, our stakeholders today. My job is to provide an economic update. I'll spend about 25 minutes or so talking about the economy and where we are right now in the business cycle and what this means for real estate and construction in particular. Now, of course, we know that the number one factor shaping economic outcomes, at least globally, continues to be COVID-19. This Delta variant continues to hang around as does this broader pandemic. You might remember earlier during the pandemic there was this notion among many that this was going to last, oh, maybe two or three weeks of the outside, that we'd shut things down, flatten the curve of infection and we would be able to restore the status quo ex-ante very, very quickly. Well, now we've been in this for the part of two years.

And what that means is that people's behaviors have changed, the way in which they buy things, what they buy, whether or not they want to work so on and so forth. And so we'll talk about some of these permit behavioral changes and what that means for real estate and construction during this presentation, of course, during Q&A as well. Now, there's lots to complain about. So we can complain about the fact that during the third quarter of 2021, for instance, the US economy slowed pretty dramatically. So during the first half of the year, largely because of stimulus injected by the Trump administration in December of last year, and then again by the Biden administration in March of this year, in the first half of 2021, growth was pretty solid well above 6%. But during the third quarter of 2021, the US economy slows dramatically growing just 2% on annualized basis.

And the Delta variant had a lot to do with that but there are other factors of work that we will also discuss. But unfortunately that's not where the big news ended on the macroeconomic front. We also suffered a bout of inflation during the third quarter with consumer prices rising more than 5% on annualized basis. So what we got during that third quarter, of course, now we're in the fourth quarter is a snafu width of stag inflation, slower economic growth, more and more inflation. We can talk about other things too, supply chain disruptions, higher transportation costs, higher materials costs, so and so forth. And we're going to talk about a lot of these things. But it is still the case that the US economic recovery, at least for now remains in place. And you can see that in many different ways, including in the labor market.

So as if things were not complicated enough, there are two colors of bars here, blue colored bars index to the left hand vertical axis, red color bars to the right. Now, this is monthly change in US jobs. And reading from left to right, the last blue colored bar here is February of 2020, the last pre pandemic crisis month in America. February of 2020 was a month for which America adds 289,000 jobs. February of 2020 represents the culmination of a 113 month period in which America adds jobs each and every month with only one exception, February of 2019, a chilly month. And over those 113 months, America adds 22 million net new jobs. We drive the official rate of unemployment down to 3.5%. Well, that was a 50 year low. You'd have to go back to December of 1969 to find unemployment as low as it had been pre-crisis.

And just to give you a sense of how long ago that was, the Orioles were good back then. Now, for Baltimore I know such things no one can even remember it. Now we shut down the economy in March of 2020. The first red colored bar here and again, these are indexed to the right hand vertical axis for reasons I'll get into it a moment. But in March of 2020, as we should shut down the economy, we lose 1.7 million jobs. But that is misleading. Why? Because the so-called reference week, the week during which the underlying survey was conducted was relatively early in March. So a lot of the jobs lost in March of 2020 did actually show up in that job report. They would be reflected in the April of 2020 jobs report along with many of the jobs lost in April, of course, and in April of 2020 America loses 20.7 million jobs.

That's that big red negative bar that you see there moving towards the south of the slide. So if you do the math on that, between March and April of 2020, we lose as many jobs as we had added during the previous 113 months, 22 million jobs lost. So we gave back nearly a decade of job growth in a few weeks. And again, that's why I had to bifurcate this vertical axis because if I tried to graph a number like negative 20.7 million on a single unified vertical axis, a lot of these other vertical bars will simply disappear from view. And around this time there's this raging debate in the economics community about what the economic recovery, what it begins would look like. Would it be U-shaped, V-shaped, Nike Swoosh, check mark, square root, hockey stick? It was a straight up V. For instance, during the second quarter of 2020, the US economy shrank from a GDP perspective, gross domestic product, 31.4% only to rebound during the third quarter growing 33.4% last year. That's that V-shape recovery.

And you can see some of that in the jobs data as well. So around that time, the spring of 2020, there was a survey conducted by the Wall Street Journal. And the Wall Street Journal asked economists mostly from large US financial institutions, not small business operators like myself, what was going to happen in May of 2020? And those economists collectively predicted that in May of 2020 America will lose another eight million jobs, but that didn't happen. We didn't lose eight million jobs in May of 2020, we added 2.8 million of them. Far by 4.8 million jobs added in June and 1.7 million jobs added in July of 2020, and 1.6 million jobs in August and 716,000 jobs in September and 680,000 jobs in October, phenomenal. Now, for a reason we'll get into, by the fourth quarter of last year, momentum is waiting. And if you look at this chart carefully, you'll see in those red bars, one sliver of a bar that's slightly below the zero line, that's December of last year, a month during which we lost 206,000 jobs.

Stimulus again, injected by the Trump administration in December itself of last year then again on March 11th by Joe Biden and his administration, we've been adding jobs ever since. Now, we had some somewhat disappointing jobs reports, but the last report that we have is for October as I'm presenting this for you, and that month we added 531,000 jobs. Now here's what's interesting, a lot of people are complaining about inflation, whether steel prices, aluminum prices, copper prices, fuel prices, food prices, we've suffered a dose of inflation here and we all know that. But I think one of the reasons that we added so many jobs in October is that many Americans are having more difficulty paying their bills, food price are higher, fuel prices are higher, inflation generally is higher. And so they decided, you know what? I need to get back on the job, I need to come back to work. And so we filled more available positions in October than we had in previous months.

Now this inflation story is not over. And so the implication of that is that as we head into the deeper winter months, and then as of course, we're close now to January of 2022 and as we continue to move through the winter and into the deeper parts of 2022, that more people finding it increasingly difficult to pay their bills are going to ultimately rejoin the workforce. And that's one reason to believe that next year will be a year of economic growth in America. Now, along the dimension of gross domestic product, America has more than fully recovered. So despite that third quarter slowdown, by the second quarter of 2021, GDP was 0.8% above its pre-recession peak. Along many other dimensions, we have not fully recovered. So for instance, if you compare February of 2020 employment, and why February of 2020, that's the last pre pandemic crisis month in America versus October of 2021, which is as of this moment, the last data I can show you, the last data point is for October of 2021. If you compare those to end points, we're down 4.2 million jobs.

You can see that in a caption toward the bottom of the slide. These horizontal bars represent the number of jobs lost by each of these industry categories over the course of the pandemic. So what I'm trying to say here is that the category called lesion hospitality, which is mostly a restaurant or a hotel worker is down nearly 1.4 million jobs. And yet you'll talk to many restaurateurs who will tell you, "I can't find workers, where are they?" That's been the challenge. As I'm speaking right now, the latest state indicate that there are 10.4 million available unfilled jobs in America, 10.4 million. The problem has not been that employers haven't wanted to hire more workers, of course they want more workers. The problem has been to try to induce more Americans to fill available jobs.

Construction is down 150,000 jobs. So ostensibly you might think, well, it should be pretty easy to recruit carpenters, pipe fitters, plumbers, electricians, HVAC professionals, glaciers, roofers, so on and so forth superintendents, estimators, no. It remains very, very difficult to find construction workers. One of the reasons for this is that many baby boomers retired earlier than they anticipated during the pandemic for any number of reasons. And so we're left with younger generations having to fill these available job openings. And of course, many of them were not trained in construction as it turns out for all kind kinds of reasons. And so, yes, it is still very, very challenging to try to fill available job openings despite the fact that we are down 4.2 million jobs since the pandemic began, as I say, roughly in February of 2020.

So again, the hope would be if you're looking at things from a macroeconomic perspective that more people are going to jump back from the labor force, and that becomes even more important of a consideration when you consider this slide. So as I mentioned just a moment ago, we entered this period with a 3.5% rate of unemployment. By April of 2020, that's the big peak you see here, we're at 14.8%, April of 2020. And now here I'll offer you some additional granularity. I'm showing you male unemployment in blue, female unemployment in green and overall unemployment in red. So the previous economic downturn, the so-called great recession was harder on men than on women. And that had a lot to do with construction. During the period of its downturn, construction shed 2.3 million jobs, over the course of this pandemic it was 150,000. So this is just a different order of magnitude, but of course, construction then and now, a male dominated industry and so men suffered relatively more and also manufacturing chipped in another roughly two million jobs lost, another male dominated industry.

This time was different. This time was lesion hospitality, that's your hotel and restaurant worker, retail trade, home health, daycare centers, private schools, public schools, physicians’ offices, dental offices. So in April of 2020 while the overall rate of unemployment was 14.8% because so many female dominated occupational categories were directly implicated by social distancing, that month for women in America, the unemployment rate was 16.1% for men that month 13.6. You can see the improvement generated since that time. In fact, by October, we're back down to 4.6% unemployment. So if there's this notion out there that well, look, there's lots of folks still out there looking for jobs, that is not true. We only have about 80 unemployed people in this country for every 100 job openings. So a lot of these job openings will not be filled. That's why it's so important macroeconomically for many of the people who have been pushed to the sidelines or pushed themselves to the sidelines to rejoin the labor market to start looking for jobs again and again, help fill some of these unfilled jobs.

Otherwise, this recovery is going to stagnate, because we just simply do not have enough workers to satisfy the supply side of the economy to meet all of this demand and we'll talk more about demand later on in the presentation. Now, the organization known as JP Morgan conducted a study regarding missing workers effectively. This is worker shortages, estimated numbers of workers missing from the labor force since the pandemic's onset. And what they conclude is that based on wages and demographics, so on and so forth, that the labor force is about 7.5 million people smaller than it ought to be. So why are they not there? So if you look at the very dark blue segment at the bottom of this slide, this sort of snap chart, you'll see that, well, a lot of it is because many people receive lots of stimulus payments during the pandemic and therefore have not felt an urgency to return for work.

But now of course with this dose of inflation and it becoming more and more difficult to pay bills and buy gasoline and so on and so forth, one suspects that this will induce more people to come back into the workforce. And of course for many months there has been this issue of whether or not we'd have a new stimulus package, so on and so forth. So a lot of people who had been waiting for stimulus packages may have already decided by October to go ahead and find another job. You can see here excess retirees over trend. So again, many baby boomers retired earlier than anticipated. So that was responsible for another 1.5 million American workers leaving the workforce. And in many cases they would still be in the workforce, but for this pandemic. And so again, the issue right now is how responsive will be the labor force to all this demand for workers right now.

And there's some feeling that some workers will come back and we saw some of that in October, of course, but again, we're down to 4.6% unemployment. So already we're facing significant labor force constraints. Now what about construction? So I mean, I could talk at length about all manner of things, the fact that many Americans have moved to the suburbs, that many sales have moved online and that many retailers went bankrupt during this pandemic. So among them pure and imports, true religion, J. Crew, JCPenney, Neiman, Marcus, Francesca's, Guitar Center, Brooks Brothers, Lord & Taylor, so on and so forth. And so one of the challenging aspects of this is that a lot of space was vacated during the pandemic whether retail space, restaurant space, many gyms were closed down, so that space is now available to the market.

So what about real estate and construction? What has the pandemic meant for that aspect of economic life? So one of the things I want to do for you as I move toward the tail end of this presentation is I'm going to show you a number of leading economic indicators. Here's the favorite leading economic indicator probably for commercial construction in this country. This is the architecture buildings index. It's a leading indicator because if architects are busier upstream, contractors are likely to be more busy downstream or busier.

So if you look at that 50 yard line running West across that slide, any reading above 50 means that architects are busier this month than they were last month. And what you see here for the right side of the slide is that over the last eight months, architects have become increasingly busy. And again, the notion is, well, if architects are busy designing work, contractors will eventually deliver that work on behalf of project owners, but not so fast. This time around, I think that this could be a somewhat misleading leading indicator. Why? Because if you think about the US economy, what's really driving a lot of activity right now, in fact, what's driving a lot of the inflation, liquidity and money supply. And of course, low interest rates.

There's a lot of money out there. There's a lot of investible cash out there. And a lot of investors are looking for ways to deploy capital. And of course, stock market seems pricey and the bond market seems pricey and Bitcoin has been pricey. And so one of the places in which to deploy capital is real estate and often real estate investment translates into construction. So what you have right now probably in some cases is that a lot of investors are kicking the tires, trying to figure out, is there a way for me to generate some rate of return here through a construction project by buying real estate and modernizing an office building or a hotel or a shopping center or whatever it happens to be.

And so what I've noticed here is that in many cases projects are designed, they're ready to go, permits are pulled, but then the project does not move forward. Why? Because the bids come in higher than the project owner anticipated. And why is that? Because we don't have enough construction workers and because materials prices of course have been surging. And I'll talk more about that as well. Nonetheless, this leading indicator suggests, all things being equal, that we'll continue to see construction recovery. And of course we have been seeing construction spending recover, certainly residential construction spending though some non-residential or commercial segments have been weaker. And one of the reasons that some of these commercial segments have been weaker relates to what was going on pre pandemic. So as defined by the US Census Bureau, there are 16 categories of nonresidential construction in our country.

And these horizontal bars represent the percentage change in construction spending for each of these 16 sectors for the five year period spending from February, 2015 to February of 2020. So what I'm trying to get at with this slide is what were we building a lot of prior to the pandemic. At the very top here you see that public safety category set that aside for now, this relates to the pandemic response. So by February of 2020, obviously government knew about the pandemic, was busily transforming convention centers, for instance, into temporary hospitals like the Javits Center in New York. So that construction spending was put into the public safety category. And so you saw that big surge in public safety spending, which of course now is declining as we've begun to close, for instance, mass vaccination sites, that kind of thing. Now the second category here is office. We built a ton of office space in this country just before this pandemic.

And now we know what? That many people are as productive or more productive working from home as in the office. So as it turns out, the office is filled with distraction. You might remember that the most popular sitcom for the previous decade was called the office and all this dysfunction. So we're human beings. And so one of the things that happens is you have to commute into the office. So now you're dealing with highways and byways and thorough furs and other types and so on and so forth. And now you're into the office, right? But you brought things for a grueling commute. You're already angry before the workday starts. Then you put your stuff down and you're a human being, so you start talking to human beings about other human beings. Probably around the water cooler you might have some water, then coffee break number one, coffee break number two, coffee break number three, free Splendas, irresistible.

Then an impromptu staff meeting that someone calls because they thought it was a good idea. It wasn't, it never is. And then lunch, that's what your morning looked like. Not yours necessarily, but your coworkers. And then of course after lunch, filling out the NCAA bracket, not once or twice, but 14 or 15 times, because you're trying to figure out if St John's could be Tulsa. Now don't get me wrong, please. We know that homes are filled with distraction too. And we know and what they are, neighbors, pets, kids, daytime soaps and sports center. But the data coming out of China, Germany, the United States indicate that many workers are more productive or as productive working from home, but that's not what really matters if you think about it. Why? Because who cares most about productivity? Employers. But again we're in a country where we have about 80 unemployed people for every 100 job openings.

So who has negotiating leverage right now? It's workers. Is it any coincidence that John Deere suffered its first strike in 35 years? No. The negotiating leverage right now is with workers. And while employers care a lot about productivity, workers probably care more about quality of life. And for many of these workers, they have indicated they would prefer to work remotely. So we're seeing that in white collar segments across the board, technology, accounting, so on and so forth, this move to remote work and probably something that lingers well past the pandemic. And that's not good for office space demand.

And number three, logic. What's that? That's hotel room construction. We built a ton of hotel rooms just before this pandemic. And now of course we can have meetings in this fashion. I mean, we could before, but we didn't have to. And the thought was, well, let's be live. That's best. Let's shake hands, pump fist, I'll come with the Ravens in person. But now of course, we know that we can have meetings by Zoom and via Zoom and so on and so forth or on 24 other platforms, Cisco WebEx. And so what that means is that business travel is not going to recover very, very quickly.

Business travel is coming back to a degree, don't get me wrong. There are more conferences that are taking place in person, that kind of thing, but obviously you can save money on travel and lodging, so on and so forth, Ubers and Lyfts by having meetings in this virtual manner. And so that's not good for the lodging. In fact, the next slide will show you a different time period. So this is for the five years prior to the pandemic, this is for the pandemic period, February of 2020 to September, 2021. What's at the bottom here in terms of performance? Negative 46.2% lodging, that's hotel room reconstruction. Office is up a few categories from that, negative 13.2%. Now that's misleading because the office category also encompasses data center construction. Well, data center construction has been fast and furious along with fulfillment center construction, backbones of the eCommerce economy, right? AWS which is part of Amazon has continued to build out data center infrastructure, but many other companies have as well along with government agencies.

So the traditional office space component, that's where the construction spending weakness has been and likely will continue to be at least with respect to new construction. And one of the other factors that work here, again, one of the reasons that some projects that have been designed are essentially ready to go have not gone forward. And then in some cases, some contractors have said to me, "My backlog is starting to fall because some of the projects I have been ready to start are not being pulled back by project owners." And one of the reasons for that is the inflationary factor. The fact that material's prices have been rising. So since the pandemic began, material's prices are up about 21% on average, your experience might be different from this. But look at some of these individual components, natural gas prices up 186%, still no price up 122% so on and so forth. This is also hitting the residential side of the industry.

So anything that goes into the construction of a new home, concrete slab, copper, gypsum, glass, appliances, workers, has become more expensive. Softwood lumber of course. During the period of the pandemic, softwood lumber prices have risen, they have fallen, but they remained well higher than they were or well above what they were prior to the pandemic. So that has slowed the pace of construction recovery because not as many projects, whether residential or nonresidential are able to move forward. And as I'm speaking to you right now, as I'm speaking to you right now, we don't know everything about what's going to happen with infrastructure spending. So that's been another factor that has somewhat softened the pace of recovery in construction. Now, what about the broader economy? So let's talk about the outlook now, and then I'll finish up in just a few moments.

So we economists have a tendency to excessively complicate matters and we do this on purpose. The notion is that if you don't understand what we're saying, you must be highly intelligent. Now, as it turns out though, economics is pretty basic. It just comes down to two things, came down to two things hundreds of years ago, it comes down to two things today, it'll come down to two things hundreds of years from now. It is demand and supply, that's it. And the principal source of demand in our economy is the American household. It's the consumer. You've heard the statement a billion times, the consumer's two-thirds of the economy. What they really are of course, is two-thirds of aggregate demand. So we don't just monitor what they're doing, what they're buying, how much they're spending, where they're buying it but we monitor those things, retail sales, online sales inflation.

We actually also monitor their psychology. Here's the risk of Michigan's index of consumer sentiment, are consumers happy right now? They are not. They've been dealing with Delta variant. They've been dealing with higher inflationary pressures. So the job market has been terrific for them. Wages are growing very rapidly, including in those entry level segments like lesion and hospitality, but they're not happy. But I could make the argument that never in the history of this country has the consumer been in better financial shape. Now some of that sounds deeply insensitive. I know, and you know that many Americans are facing food insecurity, that many cannot deal with their student loans.

That many are facing eviction from their apartments. That many people lost health insurance when they needed it most during the period of the pandemic. All of that is true. That's the microeconomics of the situation. At any given moment, millions of American families will be struggling financially and otherwise. That was true before the pandemic, it was even more true during the pandemic. But many American households took this moment in economic history to actually amass savings and to actually improve their household balance sheet. This is the US savings rate. This is savings as a percentage of personal disposable income. Now coming into this period, the savings rate was around seven to 8%. This is basically a reflection of how much money people take out of their paychecks every couple weeks and set aside in the saving account. It could be a 401k, could be a 403B, could be checking’s, could be savings, but they're not spending that money right away, that's the point. They're saving for another day, maybe a rainy day.

Now seven to 8% as we come into the pandemic by April of 2020, that's the biggest peak you see here, we're at 33.7%. So what happened? Stimulus payments started coming in from the Cares Act that was signed by Donald Trump on March 27th, 2020. That was a 2.2 to 2.3 trillion package, direct payments, step to unemployment insurance. Many people don't lose their jobs, so they're getting money from income, but it's money that's difficult to spend. The malls are closed. The restaurants are closed. The theaters are closed. Can't go to a ballpark. Can't take a vacation in Honolulu or Paris. So savings build up on the household balance sheet. As the economy reopens and fits and starts, those savings turn into expenditures, the US economy takes off and we have that V-shape recovery. But over much of this pandemic period, savings has been elevated.

And over the course of the pandemic, American households have amassed three trillion in excess savings, meaning savings above and beyond what they would've saved but for the pandemic. Now notice the latest date indicate that the savings rate is falling and indeed there is some information available to suggest that many American households are now dipping into savings to finance their lifestyles. And that's one of the inducements again, for them to come back into the workforce. And in some sense, that's good news. I'm not happy about high fuel prices or a high heating cost, but I am happy that there is this inducement to have more people join or rejoin the labor force. In any case, the demand side of the economy, because of all of this accumulated savings, is ready to go. It is prime to go. But as the great rapper, Rob Base, said in 1988, it takes two to make a thing go right.

And of course, some of you will tell me, "Well, that song was not about the economy, sir." You're wrong. It was. And also you'll remind me that DJ E-Z Rock was part of that. Yes, it was a duo. It takes two to make a thing go right. There are two of them. Rob Base gets all the attention because his name is on the song, I'm Rob Base and I came to get down. But the point is macro economically, it takes two to make a thing go, right? Demand is ready to go, the issue here is what? It is the supply side of the economy. And again, we could talk about supply chain disruptions all day long. We can talk about what's happened in Taiwan with semiconductor production, what's happened in Malaysia with auto components, what's happened in Vietnam with shoes and that kind of manufacturing, all that.

We can talk about the backups at the Port of Savannah or the Port of Los Angeles and Long Beach, all of that. We can talk about high trucking and transportation costs. We can talk about the fact that America is lacking about 60,000 truck drivers that it needs right now and all these supply chain issues. But here's another issue on top of those. This is additives that small businesses also lack confidence in America. This is the National Federation of Independent Businesses Index of Small Business Optimism questions small business America, is it a good time to expand your business over the next three months? You can see here in September only 11% of small business operators said yes to this question because these small business operator have also been hit by inflation. They can't find workers, they can't afford their workers. They can't retain their workers. During the most recent months for which we have data, 2.9% of all American workers quit their jobs. That's the highest quits rate in the history of this country, at least as measured by that particular survey.

4.3 million Americans quit their jobs that month. So no wonder small business are not confident. And what's the issue here? If small businesses are not confident, they will not expand capacity. And if they don't expand capacity, the supply side of the economy cannot meet demand where it is. We do not have that crescendo of transactional volume and that more rapid economic growth. And so the economic recovery continues to be constrained by the supply side of the economy. Now that said, and that notwithstanding, it is still the case that many economists out there are quite confident regarding the 2022 economic outlook. This comes from the International Monetary Fund. So if you were to look at this chart, you'll see that much of the world is expected to grow in 2022, the global economy is expected to grow 4.9%.

Go to the middle of the slide you'll see here that the US economy forecasts to grow 5.2%. Now, I just don't see how that can happen. And the reason is because demand is strong. That's true. We've talked about that, household demand. And by the way, business demand is strong. Here's what I mean by that. Many businesses are trying to increase inventory to meet demand. Of course, that increases orders including of imported items, but also many businesses are making investments in productivity, in equipment, for instance, because they can't find workers. So between consumers and businesses spending is high, demand is high, well, what's the challenge here at the supply side of the economy. And I understand that global supply chains are likely to become more orderly in 2022 that we will have more semiconductor chips and so on and so forth and that that will prompt economic growth. But we still have a shortage of truck drivers and we still have a labor force in America that can't fully meet demand.

So I would think that a forecast more like three to 4% would be a more reasonable growth forecast for 2022, but we shall see what 2022 brings. But just that's my logic for predicting that maybe we don't get quite to 5% gross next year. My final slide, for the climate of flourish, both demand and supply sides of the economy must participate. With ongoing stimulus, demand will get a further boost perhaps, but supply continues to be constrained by numerous factors and not just in America. So these are global supply chain issues. You might remember that a few weeks ago in the United Kingdom there was a fuel shortage. Why? Not because the world ran out of oil and also not because refineries were shut down, but because they didn't have enough truck drivers to drive fuel for refineries into their various communities, whether the Midlands or wherever it happens to be.

So there are fuel shortages. That kind of problem does not go away overnight. You can't just create truck drivers out of thin air. The result is that the USAs will remain somewhat elevated for the foreseeable future, some consumers back away facing high prices, wanting to enforce stall purchases because of those high prices. And that continues to spring low of the economy for pretty rapid economic growth once vaccines become even more broadly available globally. So once we get through these supply chain disruptions, and if we can get more people into the workforce, US economy really could take off once again. I've been saying all years that the back half of 2021 should have been spectacular for economic growth, I was wrong. And what made me wrong? The Delta variant, but also some naivete. I was somewhat naive about the ability of the supply side of the global economy to restore itself.

It's going to take a bit longer, probably in many cases into 2023. The fourth quarter of 2021, the current quarter will be strong, highly shopping quarter. And many consumers have said, "Yeah, there's lots of things to worry about, but we're going to spend over the next few weeks." And so we've seen that already during this holiday shopping season. But there will be a day of reckoning one day as debt stocks come back in to fashion. What do I mean by this? We've amassed a massive national debt over time. We came into this period with a 23 and a half trillion dollar national debt, we are now screaming towards $29 trillion, $6 trillion of federal spending injected into the economy through September. And so with that, we have to think about what that means is for construction and real estate. At some point there probably will be a financial market crisis in this country that relates to the national debt.

It's not a 2021 or 2022 issue, not with the yield on the tenure treasury continue to be so low. Lots of people are happy to sit in US treasuries helping to therefore finance America's deficits. But at some point in the future, this will come back to haunt us. Your guess about when that might be as good as mine. Is it 2026 when the Medicare Trust Fund goes insolvent, 2033 when the Social Security Trust Fund goes insolvent, sometime in between, or sometime thereafter, again, your guest is good as mine, but it's something to think about if you're a real estate or construction stakeholder, because real estate and construction will be one of the hardest segments of the economy when that crisis emerges. But it's again, I don't think it's a 2022 issue. And with that, I'm done with my comments. Thank you very much. Let's go to a discussion or Q&A.

Barry Watson:Fascinating as always Dr. Basu. And yes, I do have Rob Base on my playlist, so that's back in my era. Let's talk about the supply chain disruptions for a minute. It's critical now I've heard some people say this is a six month issue, it's a 12 month issue and then we have the current Biden administration's infrastructure bill that's at the house with 78 billion aim towards addressing the interconnected freight system over five years. Do you think this is going to be improvement, do you think that six to 12 month prediction is close, or you think it's a lot longer period than that for here in the US.

Anirban Basu:Depends on the segment. Yeah, it depends on the segment. So I'll give you an example. You might remember earlier this year, there was this huge uptick in softwood lumber prices. And we economists like to say things like the cure for high prices is high prices. So what does that mean? When softwood lumber prices took off that limited the quantity demanded of softwood lumber, so home builders started pulling back on their softwood lumber package orders because the prices were simply too high, it was pricing the homes they wanted to build out the market. But also when prices are high, that's an inducement for suppliers to increase capacity and increase immediate supply. So we saw lots of sawmill start to add shifts, and we saw more sawmill construction. And so guess what? Softwood lumber prices fell. So that's the supply side, the market aspect of the economy coming back in the face of high prices.

And I think you're going to see that in energy markets, you're going to see that in steel, aluminum, copper markets. As I'm speaking right now, copper is roughly on a record high. So again, eventually these prices will come down. And some of this inflation that people have been saying is transitory will prove in fact to be transitory. So there's that. Again, one of the issues here is how will other countries respond to COVID-19? So recently the Chinese government shut down the third largest container as cargo port in the world or at least parts thereof because of a COVID-19 breakup. How many people had COVID? One. And so there're probably going to be some more infections over time and so more shutdowns in Southeast Asia and other parts of the world. So the supply chain is not quite ready to get back to it. As vaccinations progress, as the Delta variant recedes, the hope of course and the thinking is that supply chains will become more orderly during the first half of 2022, that should set the stage for economic growth.

But again, you don't just create truck drivers out of thin air. And so one of the things that I would hope that the Biden administration would think about as it spends on roads and bridges and broadband electrification and so on and so forth is training the next generation of construction and industrial workers generally, really putting more people into the skilled trades. That's very much going to help because one of the things that we know is going to happen is when this infrastructure money hits, there're not going to be enough workers to deliver the construction services. And that's going to extend the period of investment, extend the period of spending. And so we're going to have to wait for the positive economic impact in many cases because we simply don't have enough workers to install the infrastructure.

Barry Watson:Daniel, I know that it's a hard thing to follow, but we'd love to have your insights.

Daniel Pomfrett:Yeah. No, I completely agree. And it's very difficult to try and hone in on an exact time period of when the supply chains will rebound. As Dr. Basu said, it's going to be very specific to the sector, also the location because we are seeing on the construction side that locations that are just a hundred miles apart are seeing very different conditions and different issues in terms of supply and deliveries. We are also seeing, and you mentioned there about the lumber prices, but there are sort of indirect price pressures then being put on things for like aluminum stats, for example, because people have switched their construction techniques from softwood lumber to aluminum. And then we're going to see these continued sort of external issues.

Like for example, we had a lot of winter storms down in Texas that is affecting chemical production, which will then subsequently we're expecting a second wave of price increases for example, and anything that's related to that like PVC insulation, roof materials, things like that as well. And then the final point is that on the international side, and you saw the graph that Dr. Basu showed, was that lot of the countries where historically the US has sourced and countries outside the US have sourced products from are going to see big exponential growth over the next 12, 18 months.

And so what we're seeing is that there's that potential that whilst their production lines are going to be up and running, they could actually be using a lot of the materials that they would historically have shipped out. So it's going to be an interesting time. It's going to be difficult, as I said, to sort of pinpoint an exact time for it, but I can certainly see in the short term future that there are going to be those challenges. But I don't think it's going to be a blanket challenge across all materials and all supply chains. It's going to be very, very different depending upon where you are and what material you're looking at.

Barry Watson:Yeah. There's nothing quick fix about any of this. And labor shortage has always been a big issue for all industries. And especially with construction is no exception there. But there was some positive on your graph there, Dr. Basu, some positive light about October with 531,000 jobs created there. That's a glimmer of hope. Do you kind of see that going forward in that same rate or is it much the same?

Anirban Basu:Well, some of that was seasonality. So I mean, some of the previous months estimates were held down by so-called seasonal adjustments. So some of the performance in October was artificially bolstered by some of these statistical practices, which labor economists engaged. And so that's part of it, but also it's October. So what's happening? Retailers are staffing up for the heart of the holiday shopping season. So that doesn't last forever. We're in December now, of course, and so what that means is that's not going to be that kind of hiring going forward. In fact, by January, February, which you typically see is that retailers start releasing labor. And we're down to 4.6% on unemployment. So there are just not that many workers left to hire. The Atlanta metropolitan area in Atlanta, the unemployment rate for that region recently was at 2.5%.

So in the Atlanta area and some other regions around the country already we've soaked up much of the available workforce. So job growth probably will slow going forward. My hope of course is that a lot of people sitting on the sidelines, those seven million or so people who should be part of the labor market who aren't right now will decide they have to join. And again, one of the reasons for that is life is getting more expensive faster, that's inflation, and they might not want to work, but I'm not so much worried about their happiness, I want the macro economy to function, and we need them for that to function.

Barry Watson:Daniel, what are you seeing on your side with your consulting practice in your clients?

Daniel Pomfrett:Yeah, I think very soon really – for many years now there's been pressure on labor in the construction force and the pandemic in some ways offered a small respite to that as construction sort of slowed down from the pace it was running. What we will expect to happen in the future from our side is that the projects that were put on hold or we saw very few projects canceled, but the ones that were put on hold now as they come back to the market, they'll just add to the projections that we were previously expecting in 2022 and 23. And then once you add the infrastructure bill into it, which is still really unknown how that's going to affect in terms of is that pure new bill construction or buying of equipment or such life or processes.

So there's going to be that continued pressure on the labor market as we move forward. And we're seeing various different sort of adaptations of techniques that people are using, for example, new technologies and such like as well. So I think that the industry's going to be looking at different ways, smarter, more efficient ways to work, but certainly that labor issue's going to continue there. And we didn't employ as many labor or going to employer as much labors as needed for 2021. And as Dr. Basu was saying that in 2022, you've got to then exponentially add to that as well. So it's going to cause an issue.

And generally what we're seeing is that the person who has that sort of 10, 15, 20 year experience, that's where the big lack of available labor skill set is. So unfortunately that's one of the things that you can only sometimes experience. And we're seeing some of those people now as we go through this pandemic period starting to gain that experience, but that's where we're going to see the real challenge for the labor market.

Barry Watson:Definitely. So one thing this pandemic has definitely taught us is to respond to it and innovate, and we've come up with some new ways to do it on. A lot of technology plays a big part of that. It was interesting your slide, Dr. Basu, about just the magnitude of the increases in material prices, gas prices, natural gas, 186% increase steel mill 122, iron and steel 93%, gas prices at the pump are certainly playing a factor to us at two people's paychecks bottom line. But do you see this continuing or do you see some sailing of prices going into 2022 and beyond?

Anirban Basu:Yeah, I hope I don't try to be naive here, but a lot of the inflation that economists, including those of the Federalists or Bank of the United States have been suggesting is transitory is transitory. A lot of inflation is temporary. Again, what happened here? The pandemic stands for a number of propositions. Here's one. It's pretty easy to shut down capacity. You can mothball a ship, you can lay off workers and put them on unemployment. You can close a factory, you can do all kinds of things, right? Close a sawmill. It's very difficult as it turns out to bring that capacity back online. And part of the reason for that is because the pandemic lasted so long, better part of two years so far. And so behaviors have changed, many workers. Again, baby boomers retired. Those baby boomers in many cases were our best construction workers.

They grew up at a time when construction was really the choice job along with manufacturing. They enjoyed shop class, right? Shop class was typically taught by somebody with gigantic arms wearing a rush t-shirt who drove a Z28 with a girlfriend named Stacy or boyfriend named Tim. The point is, we don't have shop class anymore. And lot of young people are not exposed to the construction trades. And so they're thinking four year college degree or they're thinking something else. And so we have all these middle income jobs they go begging each and every day in this country. And the baby boomers in many cases retired in large numbers earlier than they anticipated. And so we're again left with these younger generations and we just do not have enough skilled trades people out there.

So one of the ways to address that, of course, is through technology that has been mentioned, but technology often is expensive, which is maybe one of the reasons you might continue to expect to see consolidation within the construction industry, so that you have bigger balance sheets buying that technology we shall see. But of course, we've seen a lot of that in recent years.

Barry Watson: Daniel, how about you with Cumming Group and the data analytics that you all provide, that you look at and you kind of foresee on these prices going forward?

Daniel Pomfrett: Yeah. I mean, I think as we've talked about the supply and demand is going to be where the real pressure is. And so long as that continues, then I think you're going to see that continued increase in pricing. I think the last report I saw was that the construction salaries over the last year went up about 3.2% and that was during the pandemic period. And it's interesting because what most people's last sort of data point is the 2008 recession where construction stopped and we saw the graphs earlier about what happened with unemployment and the GDP and such like. But what we've really seen is that with this price, it's a sharp decline, sharp incline as well. But construction was still in most places an essential service and yes, we had some blips where some locations sort of pulled that back and did the slowdown of the industry, but in the main, everything continued.

And so we haven't seen as much of a disruption in some aspects that we have seen in previous times. So as you look forward into the new year, again, that labor's going to be where the real pressure is going to be. And we can see those prices really sort of continue as you go into the new year and potentially into the following year as well.

Barry Watson:Yeah, we will. It's a wait and see and certainly no one has a crystal ball, but what about Dr. Basu, you have a nice global slide there, but what global trends do either you see shaping the construction industry, let's say further past a year from now, maybe five years plus, are you seeing any what could be some different trends that could be forming?

Anirban Basu:One of them is that more of the global supply chain we brought back to North America, there are a number of reasons for this. But of course, I think many CEOs are just tired of all the supply chain disruptions. Also there been issues about intellectual property protection. Late in 2019, Congress ratified the US MCA, the US-Mexico-Canada trade agreement, the so-called new NAFTA. And that agreement has within a greater requirements for local production, meaning North American production, if a company wants to benefit from favorable tariff of treatments. So for all kinds of reasons, you should see more of the supply chain or the next decade let's say coming back to North America, and that might help reduce some of this price volatility going forward and that also might help reduce some of the transportation costs that indirectly or directly impact contractors. I think that's one of the mega trends.

The problem here is this, one is that a lot of these American companies that have had their supply chain, let's say, in Asia or in Mexico have capital there. And they don't want to simply abandon that capital, that productive physical plan. And also we don't have enough workers in this country to support industry. So there are not enough mechanics, machinists, tradespeople, we've talked about all of that, mill rights, all that. And so that's a problem. So again, this is one of the reasons that whoever's in charge in Washington, DC should really be thinking about accelerating the formation of that skilled tradesperson workforce, because it would expand our middle class, allow us to bring more of manufacture activity back home and of course, better compete with the Chinese and other emerging powers around the world. So in that case, that's one of the mega trends I see globally.

Barry Watson:How about you Daniel, anything to add on that?

Daniel Pomfrett: I think environmental will be a very big issue. How we construct materials, how we construct buildings, energy outputs, fossil fuels, all of that is going to be really important. And that is all going to really lead into every aspect of the construction industry from delivery to like say completing the construction. So already we're seeing a lot of laws, for example, not just in the US but around the world where they're looking at restricting fossil fuels and carbon footprints and things like that as well. So I can see that being a very much a trend for the industry moving forward. And we mentioned it earlier, but how the reactions to the pandemic is, is going to be interesting. We're now seeing, and I can't remember with the exact figures, but low numbers of worldwide population have been vaccinated.

So how that will then feed into the wider market I think will be interesting as well. And then just how different sectors are really going to adjust to the market. So, for example, we've already seen retail industry, which is already on the downward turn prior to the pandemic have started to now sort of use it as a bit of a silver lining and use things like curbside pickups. In the general thought that's going to stay because that allows customers to come to the shops and it gives them a bit of a tool to fight against eCommerce. We talked about commercial and offices, how that will work with people going back to the office or working from home. And when people are back to the office, do we have these large now mega headquarters or do we have hotel in? So I think there's going to be a few fundamental changes that will drive the markets in the individual sectors, but it's going to be interesting as we move forward into the new year definitely.

Barry Watson:Well, it definitely really will. I think we're just about out of time, gentlemen. I want to thank you both for taking time out of your day-to-day to join us on this first session. And we just ask our listing audience to please join us for part two where Daniel and I, along with Meloni Raney of Texo will do a round table discussion over some current market issues and possible key solutions for the construction industry. Thank you all for joining us, and I'm going to turn it back over to Bella.

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