Recession or Correction? An Interview With Linesight
Linesight, a construction consultancy service, has released a U.S. commodity report for Q3 2022. Following a period of volatility seen earlier this year, Linesight is seeing signs of stabilization, moderation and market correction, with material prices generally easing, albeit at elevated levels. Downside risks remain around the world, however, so Construction Executive sat down in an exclusive interview with Damien Gallogly, vice president – western region, and Christopher Delaney, commercial manager – western region, to discuss U.S. commodities, supply chain and risk in the near future.
Construction Executive: What is the purpose of the report?
Damien Gallogly: This is the fifth such report because, based on discussions and feedback, we wanted to have more intelligent reporting for our clients. There’s a lot of uncertainty in the markets due to issues with the war in Ukraine and hyperinflation increase in interest rates, commodity prices, supply chain disruption, oil prices, etc. All these factors continue to create challenges for businesses.
We’ve had two quarterly declines. That's what people historically would call a recession. But then the flip side of that is, we've seen positive indicators that we're in a strong, resilient market. We've had low unemployment, which counters that argument. Hopefully the inflationary pressures will continue to ease. Generally speaking, we're seeing that the supply chain will improve.
This report gives clients advice as to how we can mitigate the risks, both from a program point of view and from a commercial point of view.
CE: Are you seeing the cost of funding starting to impact capital plans for 2023?
DG: We’re seeing a lot of corporations not meeting targets. In addition, some suppliers are saying some of their clients don't really have the appetite given the high prices right now. Generally, we've seen a strong emphasis, at the end of this quarter, on clients looking at savings targets. And then looking at savings targets for next year.
I think a lot of clients have pushed to initiate long term agreements for 2023 to try and stabilize their spending outlook. So, to answer your question, we're not sure yet. We're still seeing projects coming through the pipeline, so it doesn't seem to be having a huge impact just yet, but it'll probably be more in December 2022 where we actually see those capital plans come.
CE: What has changed in the labor market since the last quarter?
DG: We've heard of lots of different layoffs in the industry. Some of the big multinational firms have implemented a hiring freeze. We're seeing the prevalence of more temporary contracts, which we wouldn't have seen six or nine months ago. There's still a serious shortage of skilled labor, particularly around electricians. A recent survey found that well over half of general contractors say that finance-skilled resources is the biggest barrier for them growing their businesses.
CE: Do you see that improving?
DG: In the short and medium term, it's probably going to stay the same. It depends when we officially go into recession, but workers still have expectations around wage salary increases. Recent studies still show 4% to 5% in increases. So, that's going to have an impact in the next six months.
When we talk about commodity prices holding or reducing, it's countered by the fact that these salary increases are there. And in terms of upskilling the workers, that will take a number of quarters to ger clarified and sorted out.
CE: What does the outlook look like for the construction industry across North America?
DG: What we touched on in the report is that the forecast has probably set the decline nearly as much as 7% this year. A significant contributor to that will be the residential sector, directly related to interest rates from the Federal Reserve. There’s a lot of volatility in pricing.
We're still seeing a lot of activity in the tech and life sciences sectors. They’re not seeing the same viability challenges as the other markets, but we still continue to keep our clients informed of the risks. For example, down the line, the cost of finance in the market may start to be an issue with venture capital. But we don't see any significant slowdown of mission critical markets at present.
Christopher Delaney: If you're looking at the media, it's a bit negative because of your targets and prices. That's making people nervous, especially for large tech and infrastructure clients. But the U.S. infrastructure bill is starting to take some effect. We're starting to see airports and other infrastructure projects online. Another one we've seen picking up lately is retail—a lot of retail clients are looking to either expand or refurbish their existing stores.
CE: It sounds like the market is going to be improving, correct?
CD: I think it's going to be more stable, but I don't think we'll see huge growth. There’s going to be decline, because that’s where the interest rates are going; the Fed is still being aggressive. So it will be important to see if the rates come back.
CE: On the non-mission critical side, such as commercial property and life sciences, what do you expect?
DG: In the life sciences, things are still fairly busy. We're working with a number of key clients who were instrumental in working through the vaccination program. There are still laboratory testing facilities where construction is ongoing. There's probably going to be a slight drop into Q4 2022 and Q1 of next year. But no major dip. If you’re looking at materials pricing, we’ve split that into east, west and central, and it is going to be consistent across the board.
CD: Overall, the construction industry is going to drop a couple of percentage points. Materials prices are generally going to hold the same, but there are other impacts, such as bidding strategies and whether general contractors will try to hold their pipelines. What element of risk will they be including in projects when they bid them? Certainly, general contractors will be nervous about bidding for lump-sum projects at the minute. When will clients get funding? When will they break ground? In the last couple of months, materials prices change every couple of days, so it’s a difficult time for contractors. Historically, we would've had tender submissions that would hold the price for 60 days or 90 days, but that's now down to two weeks.
CE: Do you think that COVID-19 will continue to impact the industry?
DG: Yes, I think around kind of the general requirements, in terms of health and safety requirements, the industry is somewhat back to normal. We are still seeing a premium around additional cleaning and separators and so on. General contractors are certainly looking for health and safety as part of their general requirements. But what we’re seeing now is more around the impacts of shipping delays and long-lead equipment.
When you compare productivity rates from this year to last year, they’re pretty much level. Next year we’ll have hopefully come out of the issues around COVID-19 and see productivity increase to pre-COVID-19 levels.
CD: I think something else to look as it how China continues to treat COVID-19 in the future. They are a big manufacturing power so there are issues with steel sometimes when they decide to shut things down.
CE: On the mission-critical side, such as data centers, what can be expected?
DG: It’s the same pattern. The big concern is that availability labor, which is particularly intensive with mechanical and electrical. This is dependent on where data centers are based, and there are areas that are popular for data centers given power availability or clean water and so on. So those do tend to be in certain states, and when you have a buildup of many different data center providers in one area, it causes more difficulties around labor. So attrition is an issue.
But the main thing, which is a consistent message when we get into pre-design workshops with clients, is the long-lead equipment and how to get the jumpstart on the production line. How can we pre-position equipment? There’s no good designing a scheme where you're going to be breaking ground in six-months time if transformers are on a 12-month-plus delivery time.
CE: What’s the general sentiment with regards to materials prices?
DG: Any materials that are heavily energy intensive might continue to see increases. Another big thing is if anything gets sourced from Europe, that could carry a premium.vAnother concern is recession, because that will cause lower demand and materials prices could drop.
So, companies should probably look at oil and gas prices and just track how that's going because that will impact materials costs, energy cost and materials. Concrete and glass could be highly impacted.
CE: other than that, how can companies prepare?
CD: Companies should keep an eye on schedules and contracts. We've seen some sites where materials are supposed to be delivered at an agreed time and they aren’t showing up. So if products are on a critical path, that might flow into the schedule or different work plans.