Recent Construction Inflation Analytics
Generally, the inflation rate in the construction industry is determined by the cost of material and labor required. Therefore, the construction level can directly influence the demand for labor and material and, ultimately, inflation. When construction is on a smaller level, the cost margin will also be reduced. Conversely, the bidding on a higher level of construction will be increased due to the high competition among contractors.
Statistics
The backlog data that has been collected from construction statistics for 2022 is very rarely seen. The construction data leading to 2022 is showing a low backlog for all the projects that started in 2021, which is very rare. The reduction in construction backlog is not normal, especially when the project starts were low in previous years. The broad and deep decline in backlog cases has been seen only twice in the last 35 years in 2002 and 2006.
The pandemic has directly impacted the construction industry with a massive decrease in spending on nonresidential projects that started in 2020. The reduced spending of 2020 is expected to increase in 2022-2023 and will continue to increase. No major downfall due to the pandemic had been experienced yet by nonresidential construction at the end of 2021, but it is expected that in mid-2022, it is going to experience a decline in volume and spending inflation. With people opting for used heavy machinery, manufacturers are the first ones affected by a decline. Experts have stated that this decline in spending and volume may impact the employment ratio, but it is uncertain because it has not been seen yet.
In 2021, 8% of inflation was recorded in spending while the nonresidential expenditure was down to 5%. A general guess is that this is due to the 23% gain in residential spending.
The recent spike in the price of heavy equipment is a result of the increasing demand for machinery. The dramatic increase in sales has largely contributed to the increase in heavy equipment costs. After the uncertainty faced by the heavy machinery industry recently due to COVID-19, it is expected in the ongoing year 2022 that the demand for machinery will increase even more. We continue to see that used heavy machinery is already more in demand now.
The Association of Equipment Manufacturers (AEM) has stated that the previous loss in the industry may be recovered with good inflation in maximum GDP in the year 2022. The sudden increase in the price of heavy equipment is due to the increasing demand by construction companies and rise in home prices. In this scenario, the sellers and renters must try to turn the situation in their favor. Despite this fact, a few challenges still exist in the industry that have to be countered.
Challenges
The first and foremost challenge is the increasing demand of heavy equipment in the construction industry. The manufacturing companies like Caterpillar, Komatsu, and John Deere are unable to meet the demand due to the limited supply of equipment. They may take 6 to 8 months, in some cases, to deliver the required order.
Delayed shipment and logistical challenges are also a trouble in the current market and are bringing a heavy load on the manufacturers and suppliers as well. Advanced technologies used in the new generation of equipment have also contributed to the price hike in the industry. These factors also affected the Florida heavy equipment auction recently where the prices went way higher than expected. It all may be due to the current shortage of equipment and supplies in every field, including heavy construction equipment as well as agricultural machinery and tractors.