The annual turning of the calendar page is an artifice from our ancient agrarian heritage. However, the prospect of a "new" year is a useful reminder to pause our frantic pace and reimagine our ever-evolving economic environment.

Reimagining 2021

I do this every year by isolating the economic variables that emerged during the year, ending and analyzing how they might impact the "new year's" business environment.

INFLATION - Thanks to a nefarious mix of soaring demand for goods and snarled supply chains, US consumer prices jumped the most in 39 years in November. The price of pork rose 16.8% and fish 8%, both dwarfed by the price of cooking oil up 39% year over year. Beef costs have climbed 41%, and the wholesale price of chicken rose 36%. The price of fuel is up 20% and producer prices (construction costs e.g.) increased at their fastest pace on record last month.

What does this mean for 2022? The central bank, after finally admitting that this pandemic inflation is not "transitory", is winding down its bond-buying stimulus program and plans to hike interest rates three times in 2022. The big story may well be, therefore…how negative will rates remain once you adjust for inflation? If inflation remains high, even a series of rate hikes will leave real rates deep in negative territory which will not curb inflationary pressures. With the labor shortage exacerbating supply chain issues, inflation may well be a conundrum for the entire business cycle. (beyond 2022)

 SUPPLY CHAIN - Prior to pandemic forces finally snapping an already stressed supply chain, most people didn't even know what "supply chain" meant. Two critical economic factors have been evolving and putting increasing pressure on the supply chain for many years. They were finally conflated by COVID-19, and the already stressed supply chain began to clog and fall behind demand. The two factors are -

1. The persistent offshoring of our manufacturing and raw material production for the past 50 years. (Approximately 85% of construction materials are produced offshore and shipped back to the US through the "supply chain".)
2. The most critical factor in supply chain stress currently is the lack of truck drivers to haul goods away from the port of entry to their final destination. Industry research shows that the weighted average age of truck drivers in North America is now 46-50 years of age. Drivers typically spend many days and hours away from their families. Drivers work long hours sitting inside a truck cabin, developing poor eating habits, and having sub-optimal opportunities for physical exercise. Diabetes, heart conditions, and musculoskeletal issues have become a plague among drivers. Coupled with the gradual stagnation in truck driver pay, these factors combined to motivate many drivers to quit the business during the worst of the pandemic slowdown. Most have not returned to the industry.

What does this mean for 2022? The shortage of supply and the resulting inflation in price of building materials will not go away in 2022 because the two critical causes require long-term solutions that have not even been imagined yet.

SKILLED LABOR SHORTAGE - Again, the 2021 shortage of skilled labor in the construction industry has been evolving for many years. It was not caused by the pandemic and will not be resolved when the pandemic eases. The skilled labor shortage is a structural problem for our industry and will only be addressed by an industry-wide concerted effort. The causes are –

1. Aging workforce - The median age of a construction industry worker is 43 years old. In fact, roughly 40% of all workers in the industry are 45-64. According to data from Center for Construction Research and Training, Silver Spring Md. workers aged 55 and over increased from 17% in 2011 to 22% in 2018. Workers younger than age 25 make up only 9% of the construction industry. However, the Bureau of Labor Statistics estimates that between now and 2026, the construction industry will see major growth and as many as 747,600 new jobs will be needed. This will wreak havoc on the industry unless we find a way to attract millennials and Gen Zers who will make up 40% and 32% of the workforce respectively.
2. Shortage of Apprentice Programs - As the influence of labor unions have diminished in recent years, their legacy apprentice programs have been unable to keep up with demand. Little has been instituted to take their place. What's more, skilled labor positions in construction are seen by millennials and GenZers as hard physical labor that is un-acclaimed, under-paid, and even dangerous. They are not lining up to replace the aging workforce.

What does this mean for 2022? The skilled labor shortage will get worse before it gets better. A long-range industry-wide coordinated solution is required.