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Source : Freepik
March 22, 2023
Author : Patty Allen
The recent closure of Silicon Valley Bank and Signature Bank in the United States, and UBS-Suisse Credit deal has shaken the global economy. Contractors and other associated construction sector founders are equally worried if their “structures” can sustain growing signs of economic recession.
Inflation has been a significant threat to the construction industry, as Contractor News has reported since the pandemic's beginning. It directly impacted the increase in raw material prices to generational highs, leading to higher project costs, delays, and closures.
According to Ken Simonson, AGC's chief economist, multiple construction executives attending the Associated General Contractors of America's national convention in Las Vegas have questioned prospective industry repercussions from these bank collapses.
The bank closures were said to have no direct impact on contractors or their projects, by those AGC spoke with. Nevertheless, as small and regional banks tighten their credit lines and making loan closings more difficult this will impact construction across the country.
One silver lining has been that nonresidential construction activity has remained strong this year.
Greg Ross, the industry managing partner at Grant Thornton, a Chicago-based accounting firm, said, “[It’s] important for construction companies to build cash reserves and maintain a certain level of liquidity.”
Also, in recent months material prices have stopped skyrocketing. For the first time since 2020, construction materials' overall cost has decreased.
Yet home builders face challenges due to a lack of warehousing storage and a tight labor market. As per reports, “Warehouses and distribution centers are pushing rates higher, with U.S. storage prices up nearly 11% year-over-year.”
The Consumer Price Index is up 6.4% year on year, and the cost of construction materials and labor is rising, making it more expensive for builders to begin new projects.
Unpredictability exists in the supply chain as well. Lumber prices have been volatile recently. The cost of concrete, steel, and industrial paints remains high, leading to higher project costs.
The construction industry must discover new ways to be more efficient and innovative.
Innovative technologies, building methods, and tools to decrease waste and boost productivity could help. In this current economic context, contractors may be forced to use lower-cost materials such as economical fireproofing and cheaper woods such as pine, maple, and white oak instead of steel or concrete goods.
To regain public trust in the nation's financial system, President Joe Biden said that taxpayer funds would not be used to rescue depositors.
Simonson believes the regulators have acted promptly and appropriately to limit the damage and concluded that the effect on the construction sector would be minimal until there has been more time to determine whether there are any other unreported issues among the nation's central banks.
Anirban Basu, ABC's top economist, said that these major financial institutions, including JP Morgan, Citi, and Morgan Stanley, predict a rate hike at the forthcoming Federal Reserve meeting. Meanwhile, Barclays and Goldman Sachs await no change to already high rates.
Basu said it is conceivable that there will be no further rate hike this year.
However, a more probable scenario is that the Federal Reserve will increase rates in the upcoming months, perhaps once or twice more. It will take several months for the effects of those rate rises to be recognized in the economy.
"With the likely tightening of financial conditions given the growing stress on America's banks and ongoing efforts by the Federal Reserve to rein in excess inflation, commercial real estate and construction are likely to weaken further during the year ahead," said Basu.
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