Design Services Industry Outlook is Rosy, But Inflation Threatens

To the ACEC Community:

 

The top-line economic numbers for the engineering and design services industry continue to be strong—and once Infrastructure Investment and Jobs Act funds start to flow, they will get even stronger—but a lot of firms are feeling significant bottom-line pressure.

 

First, the good news: Construction put in place in December was up 9 percent year-over-year. Residential construction continues to outperform, up 15 percent year-over-year, but private non-residential construction rose a strong 9.1 percent. Public construction continued to lag, falling 2.9 percent year-over-year, but it showed steady improvement throughout 2021, and the IIJA will certainly invigorate the sector in the coming years.

 

If your firm is engaged in the real estate or land development markets, I strongly encourage you to join us for our first-ever Private Markets Symposium on Commercial and Residential Real Estate taking place March 3-4 in Scottsdale, AZ. We have an agenda that is laser focused on this market, featuring thought leaders such as Andrew Warren, Director of Real Estate Research at PwC. Learn more and register here.

 

Darkening this rosy scenario is the growing cloud of inflation. Last Thursday, the federal government announced that the consumer price index rose 7.5 percent in 2021, a 40-year high. Inflation was even more dire in the construction sector. According to the Association of General Contractors, the price of construction materials jumped nearly 20 percent in 2021.

 

Two factors have combined to fuel the inflationary surge. On the one hand, materials prices have climbed due to production difficulties and the snarled supply chain. For example, AGC reported that the Producer Price Index for steel mill products rose 127.2 percent in 2021.

 

The other factor is wage escalation. ACEC is a member of the National Association for Business Economics, and in late January, the group released its quarterly business conditions survey, which contains several questions on labor costs.

 

For the first time in the survey’s 40-year history, more than two-thirds (68 percent) of respondents reported that wages and salaries at their firms rose in the previous three months. And this was the sixth consecutive survey with the rising trend. Among services firms, 58 percent reported rising wages and salaries in January.

 

Nearly two-thirds (63 percent) of respondents reported that they were passing on at least some of these increased costs to their customers, and 17 percent reported that they were passing on “all or almost all” of these higher costs. Among services firms, nearly three-quarters (73 percent) said they are passing on some of the higher costs, and 22 percent said they are passing on all or almost all.

 

Many economists expect the supply chain problems that have contributed to inflation over the past year to start to ease in the coming months, but the labor shortage and consequent rising wages and salaries aren’t likely to fade anytime soon.

 

For a more in-depth look into the current economic situation, check out our February Economic Outlook video with ACEC VP for Private Market Resources Erin McLaughlin.

 

A great way to take an active role in helping to fight the supply crunch for engineers is to participate in Engineers Week, which begins this coming Sunday. Each year, Engineers Week shines the limelight on our industry, and Member Organizations and member firms all over the country run ad campaigns, meet with students, and hold engineering events to promote engineering as a career. Let us know what you’re doing to attract the next generation of engineers and we will magnify its impact by promoting it through all our communication channels.

 

Have a great week.

Linda Bauer Darr

President & CEO

American Council of Engineering Companies | ACEC

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