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Construction firms report growth, but major challenges remain

Increased demand drives optimism across the sector, but rising costs, supply chain disruptions, and unmet labor needs loom large

June 4, 2021


Ron Wirtz Director, Regional Outreach
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Jake MacDonald/Minneapolis Fed

Article Highlights

  • Construction firms report modest overall growth, some increase in new projects
  • Workforce needs are growing, but worker availability is not
  • Real concern over rapid increases in material costs
Construction firms report growth, but major challenges remain

The Federal Reserve Bank of Minneapolis surveys people across the Ninth District to gauge their recent economic activity and their outlook for the future. Our most recent survey of construction sector firms finds an overall net-positive outlook for the next six months. The optimism, however, is tempered by increasing costs, supply chain disruptions, and lack of available labor.

Overall conditions appear to be improving for construction sector

A modestly larger share of firms reported revenue increases versus decreases over the last three months compared with the same period last year and the previous quarter. Firms reported similar expectations for the coming six months compared with last year.

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Firms overall also reported a modest increase in the number of new private projects out for bid, though new project activity in the public sector was flat overall. As in previous surveys, firms in residential construction reported moderately better results; sentiment from the other three subsectors were more similar to each other and more mixed overall. Minneapolis firms reported generally softer results, but also had easily the highest share of nonresidential responses.

Rising costs, disrupted supply chains, and labor challenges dampen growing demand

Many firms reported that overall demand appeared quite healthy, but three major challenges are throwing cold water on demand and overall activity: rising costs, supply chain disruptions, and labor availability.

The sector is experiencing significant cost increases for most materials. Over the past three months, more than 60 percent of respondents reported that wholesale material costs rose by 10 percent or more overall. Rising prices were seen across virtually all product areas. Some firms reported year-over-year increases in the triple digits for some products, much of which were getting passed to clients.

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Firms report that fast-rising costs were having significant spillover effects. Eighty-five percent of respondents said higher costs were leading to project delays and longer completion timelines; 70 percent said they were negatively affecting profits, and 65 percent said they were dampening overall demand.

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The construction sector has dealt with supply chain disruptions since the start of the pandemic. But the problem has become more irksome when materials still can’t be had—on time—even at much higher prices.

The good news is that more than half of firms reported they were hiring in some capacity, and less than 5 percent said they were cutting employees. But three-quarters of firms said availability of workers was either very tight (53 percent) or moderately tight (23 percent). In response, half of respondents said wages for skilled labor grew by 3 percent or more since the start of the pandemic, and wage expectations for the coming 12 months were slightly stronger.

Despite challenges, firms maintain a positive outlook … for now

Overall, despite challenges, firms have a net-positive outlook for the next six months; 47 percent are optimistic, while 26 percent are pessimistic. Half of firms reported they were hiring in some capacity, and less than 5 percent said they were cutting employees. Many firms commented on the effect of higher prices and material availability on their outlook, noting that if prices moderate, forecasts will improve further; but if prices don’t calm soon, activity could slow significantly.

About the Minneapolis Fed construction sector survey

Conducted May 18–24, 2021, the Minneapolis Fed construction sector survey received 507 responses from across the Federal Reserve’s Ninth District, which includes Minnesota, Montana, North Dakota, South Dakota, the Upper Peninsula of Michigan, and northwestern Wisconsin.

Responses were solid in Minnesota, North Dakota, and Wisconsin, but soft in Montana, South Dakota, and Michigan’s Upper Peninsula. Responses were overrepresented among firms in the residential sector, underrepresented in the industrial and infrastructure sectors, and balanced for the commercial sector. General and other contractors made up almost three-quarters of respondents, with the remainder in development, design, engineering, and supply. Because of factors related to response balance, readers should exercise appropriate caution interpreting summary results.

Ron Wirtz
Director, Regional Outreach

Ron Wirtz is a Minneapolis Fed regional outreach director. Ron tracks current business conditions, with a focus on employment and wages, construction, real estate, consumer spending, and tourism. In this role, he networks with businesses in the Bank’s six-state region and gives frequent speeches on economic conditions. Follow him on Twitter @RonWirtz.