Note: The war in Ukraine and its impacts on the globe are constantly evolving. The information in the article below was pulled March 14.
The war in Ukraine is a terrible geopolitical development and the hourly impact on human lives in the region is concerning to the global community. There is also growing concern on how the conflict might impact US economic activity and specifically, what may happen in the construction sector.
On the surface, the war will have its most direct economic impact on oil, food, and certain commodity prices. In the first week of March global oil prices surged to $130 a barrel before settling back into the $100 range by mid-March. Those are still elevated prices, but far from economy-altering levels. Between 2010 and 2014, the price per barrel fluctuated between $85 and $110 and the US never visited recession.
However, diesel and gasoline prices have topped all-time highs. This is where construction firms could feel their first significant impacts. The cost of getting materials to job sites and moving workers to job sites will increase as a result.
Prices for commodity metals are also under pressure. Aluminum, copper, nickel (stainless steel production), and titanium prices will see some near-term inflationary pressure on top of current high prices. Russia is a significant producer of certain metals, and it will take the global market some time to recover and replace this loss of output.
Other than higher commodity prices, commercial construction should see very little impact from the conflict. Production price pressures are carrying the biggest risk, but demand should continue to remain strong. Many demand sectors for commercial construction are still expecting record investments this year and many sectors that had been dormant for the past 24 months are coming back to life as the US transitions out of the pandemic. The same may not be true on the residential housing side of the market.
New inflation forecasts suggest that the country may not see the expected slowing of inflation pressures late in 2022 as originally thought. Prior to the invasion, most expectations held that inflation would move from 7.5% in January to 3.5% by the end of the year. New projections suggest that inflation could remain at 5.8% or slightly higher by the end of the year (the Federal Reserve’s target rate is 2%).
More than 70% of the hike in inflation rates can be tied to energy prices directly or indirectly. But housing might be the area that receives the biggest impact and carries the greatest risk.
Consumers in the entry-level and lower-income brackets are seeing their household budgets get blown up by higher prices for nearly everything. Consumer sentiment has plummeted as a result and many families have gone into penny-pinching mode. For those that were in the middle income and higher income brackets, this will not dissuade them from making a purchase. The lower end of the housing market is likely already beginning to feel some pressure.
Housing also makes up nearly 42% of the consumer price index. One of the few levers that the Federal Reserve can pull to tame inflation is interest rates. Interest rate hikes will quickly tame a housing market that has overheated in some areas. The Case-Shiller home price index has surged 20% over the past year and the Fed may see an opportunity to ease overall inflation by taking a more “hawkish” approach. Thus far, it appears as though the Fed will still take just a quarter-point first hike in March followed by 3-4 more moves similar to that in 2022. The overall rate that borrowers will pay will still be historically accommodative to buyers, but with home prices so high, many first-time home buyers will have to change the size of home that they are looking at or temporarily might delay a purchase until the market cools off.MarksNelson is keeping a close eye on global conditions affecting the construction industry. Our experts can help your company prepare for what’s ahead.