The construction industry has been experiencing an unprecedented mix of steeply rising material
prices, supply chain issues and labor shortages. Over the last year input costs, which is the price
of all materials and services, has increased 26.3%. Meanwhile, bid prices, what contractors
say they would charge to erect nonresidential buildings, has gone up just 3.4%.
Fed Chair Jerome Powell insists that the current inflation is transitory. CLIP
Warren Buffet warned that we’re experiencing much greater inflation than anticipated. CLIP
Investor Michael Burry, rightly predicted a sharp rise in inflation earlier this year.
He also said that we’re in the greatest speculative bubble of all time in all
things. By two orders of magnitude. From June 2020 to June 2021 lumber and
plywood more than doubled, rising 101%. Steel mill products jumped 88%. Copper and brass mill shapes
increased by 61%. Aluminum mill shapes increased 33%. Plastic rose 22% and gypsum rose 18%.
The Associated General Contractors of America or AGC has issued a Construction Inflation Alert
to help people better understand the current situation. I recently spoke to Ken Simonson,
author of the report and chief economist of the AGC since 2001. He synthesizes data and
feedback from general contractors in his weekly newsletter Data DIGest.
Even though lumber futures have plunged in recent months and copper futures dropped 10%,
current prices are still above those a year ago. Also, any price cuts may not show up at the local
distributor level or construction site anytime soon. Let’s look at some of the many reasons
behind the rapid inflation of construction materials and supply chain issues and examine
if we are trending towards uncontrolled inflation and possibly hyperinflation.
At the start of the lockdown, many factories, mills and fabrication facilities were shut down
because they weren’t “essential”. This led to a negative supply shock. At the same time,
we experienced a positive demand shock from people stuck at home taking on DIY
projects and renovations. Restaurants also added decks and railings for outdoor dinings and acrylic
barriers between tables. Low interest rates have also led to a surge in new home construction.
Once production facilities were allowed to open, many
had trouble getting to full capacity because they simply cannot find workers. Unemployment benefits,
rent relief, child tax credit or handouts are contributing factors but there are other reasons
too. Many workers have been ill, quarantined or required to care of family members at home. It is
estimated that 3 million women dropped out of the labor force last year to take care of their kids
because of the lack of childcare options. Another reason is the availability of remote,
flexible, work-from-home jobs that are more enticing than outdoor manual labor. Even though
construction jobs typically have a great career path where someone with a high school degree can
work their way up to senior roles, they are just not glamorous enough. Construction
jobs typically require you to be on site 5 or 6 days a week at set times.
Ken Simonson also brought up 2 other reasons for the low labor participation rates. CLIP
The freeze in Texas earlier this year led to widespread power failures and the paralysis
of the US petrochemical industry that normally operates around the clock. The production of US
olefins dropped 80%, polyethylene dropped 33%, polypropylene dropped 36%, paraxylene dropped
75%. These are the building blocks for a wide wide range of construction products including
PVC pipes, plumbing fittings, vinyl siding, vapor barriers, binders, glue for plywood and OSB and
adhesives for drywall. Cardboard, paper, plastic packaging, tapes and fasteners. It took several
months to bring petrochemical plants back to full capacity because of burst pipes, leaks and
damaged equipment. In some cases, petroleum fluids hardened into a wax because the flow stopped. Many
plants had to be evacuated of all toxic and flammable gases to prevent an explosion.
The production and shipping shutdowns in China and Europe are also contributing factors. This
affected kitchen cabinets, appliances, tubs, tile and elevators. Production has since increased
but we are now dealing with clogged ports, and a lack of shipping containers,
ships, and trucks. Ports are backed up forcing ships to wait offshore for days
before unloading which has slowed down the delivery of materials by months in some cases.
Tariffs and quotas on steel and aluminum that were imposed from 2018 to 2020 drove up the cost of
many construction products and limited the number of suppliers. It was meant to create jobs in the
US which we have not seen. Manufacturers merely raised their prices to match the tariffs. CLIP
In 2017, the US imposed new 20% tariffs on Canadian softwood lumber imports, which could
have contributed to the increasing lumber prices. While the tariffs were cut to 9% in December 2020
there are talks of increasing the tariffs back to 18%. Just as prices of raw materials have
started to level off, we’re now dealing with increased diesel fuel prices that
are affecting transportation costs. Any savings are now being eaten up by fuel surcharges.
The eviction moratorium was established in March 2020 to help struggling tenants avoid
eviction but it is set to expire soon. While it is easy to paint landlords as rich money grabbers,
77% of rental units are actually owned by Mom and Pop operations that cannot afford to let people
live rent free in their homes. The extended eviction moratorium deadlines have cut supply
of housing and led to bottled up inflation. When the moratorium is lifted, landlords will
raise prices for new tenants to account for new risks and to recoup their losses.
So, we’re in a nightmarish scenario. The cost of new construction will probably stay elevated for
a while. Rents are going to increase. Supply chain issues will take a while to resolve.
We still haven’t caught up with the backlog of demand. So, with all the money we’re printing
to put a bandaid on these deep wounds, are we headed towards hyperinflation
or are we nowhere close to it? CLIP In his quarterly report, Ken presented some advice
to help the construction industry during these hard times. He advocates for price-adjustments
clauses to protect both parties from price swings. He believes that government officials
need to remove or lessen any unnecessary hurdles to the importation, domestic production,
transport, and delivery of products. Federal trade officials must end tariffs and quotas that
are adding to price increases and supply shortage. He calls for cooperation and communication between
owners and contractors to reduce damage. I personally think that it’s an exciting time
to be in the construction industry. It’s lagged so far behind others in terms of productivity,
but this past year has been the wake up call it desperately needed. Times of crisis usually lead
to innovation. To deal with labor shortages, people are turning to automation and robotics,
particularly 3d printed concrete. That brings up other dangers of pumping millions into a
field that isn’t fully developed yet. I’ll link my video on that topic up here. Let me know how
you’re dealing with the current inflation and which meme coin you’re invested in. I’ll link
my patreon page in the description. A big thank you to everyone supporting me. Don’t
forget to hit the like button and subscribe to my channel. Thanks for watching. See ya.