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Strange Days

May 2, 2023
The more you think about the current economic climate the weirder it gets.

It occurs to me that we are right now at one of the strangest moments the mechanical contracting industry has ever encountered. There now exist incredible opportunities as well as monumental challenges, all set against an uncertain economic background.

For months now, experts have been predicting a recession that somehow never quite seems to show up. Yes, the economy contracted in Q1 and Q2 of 2022, but GDP was positive (if anemic) for Q3 (+3.2%) and Q4 (+2.6%), with slight growth predicted for Q1 of 2023.

This tracks with contractor confidence data from the most recent PHCC survey. Plumbing contractors reported a lower future confidence index of 44.2 for Q1 2023  (versus 48.9 in Q4 of 2022). So slower business, but still optimistic.

And why not feel optimistic when you have so much work lined up? Associated Builders and Contractors reported that its Construction Backlog Indicator declined to 8.7 months in March. That reading is still 0.4 months higher than in March 2022.

It follows that most contractors in new construction feel they can weather a recession. Most in service and maintenance feel the type of work they do makes them reasonably recession-proof. More immediate concerns (according to the surveys I’ve seen) include: finding skilled workers, supply chain worries, high prices and tighter financing. (There’s a new report from Billd that indicates subcontractors are the ones bearing the brunt of rising prices.) 

The skilled worker shortage isn’t going away anytime soon. Higher materials costs are due mainly to inflation, and, ironically, higher borrowing costs are linked to the Fed’s effort to fight inflation via rising interest rates. The good news is that the Fed’s efforts seem to be working. The annual inflation rate for the United States was 5.0% for the 12 months ended March 2023. A year ago, that rate was 8.5%.

The bad news is that rate hikes have pushed the housing market into recession, with residential investment contracting for seven straight quarters, the longest streak since the collapse of the housing bubble in the Great Recession. There are, however, signs the housing market is stabilizing.

Want more good news/bad news? Good: thanks to government initiatives like the Inflation Reduction Act and the CHIPs Act there’s plenty of federal money in the pipeline for infrastructure projects. Bad: all that money is bound to push labor and material prices even higher.

I have two takeaways from the current strangeness. First, demand for housing is high and likely to remain so. With 30-year mortgage rates at around 6.32%, that means less people looking at single family homes and more people looking at multifamily options—condos, apartments etc. Repeating layouts means contractors able to do prefabrication and modular work stand to clean up.

Second, there are some contractors who have the combination of expertise, reputation and capacity to take advantage of the new infrastructure work. (You can read about two such contractors in our annual Book of Giants feature.) And there are some who don’t. Whenever you have an industry where some companies are making big money while some are treading water it means one thing: consolidation. Given how desperate everyone is for skilled workers, larger companies buying up smaller ones seems like the natural course of action.

But our best guesses are just that: guesses. There’s a war in Europe the likes of which hasn’t been seen since 1945. There are politicians playing chicken with the National Debt Ceiling. Someone somewhere right now could be eating a bat or a monkey or who knows what that could trigger another worldwide pandemic. Man makes plans and the gods, they laugh. All the economic data in the world isn’t as important as knowing your work and knowing your customers.

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