Good prospects, but lack of skilled labour is a structural issue
After a 1.9% contraction in 2020, US construction output is forecast to grow more than 6% annually in 2021 and 2022. Residential construction performance is buoyant, driven by demand for single-family housing. Due to additional discretionary household income (a result of large government stimulus), robust demand for home improvement and renovation continues. However, non-residential building activity remains muted for the time being, due to less investment in office buildings. The civil engineering sector could see significant growth in 2022 and beyond, provided that Congress will approve a large infrastructure bill proposed by the government. The bill aims at comprehensive investments in aging infrastructure (including roads, highways, bridges, rail, and broadband development).
Material shortages and volatile input pricing, particularly for lumber, will continue to weigh on the industry in the short-term, but are expected to abate in 2022. At the same time, availability of labour is an issue in the US construction sector, with smaller businesses currently most susceptible to project delays triggered by workforce shortages. The lack of skilled labour and an ageing workforce could curtail potential construction output in the future.
Over the past twelve months, profit margins of businesses have improved due to higher demand, the strength of supply chains and the ability to pass on higher commodity prices. Profit margins should remain stable in the coming months, as demand remains robust. The positive outlook provides comfort for banks to lend to the industry, which adds to the sector's resilience. Currently some larger construction businesses are taking on more debt in order to fund acquisitions, as they want to increase their market share.
Payments in the construction industry take about 60 days on average. The payment behavior has been good over the past two years, and non-payments are expected to decrease in the coming months. The insolvency environment should remain stable, with no increases expected. Given the solid performance, our sector assessment has been recently upgraded to “Good”, and our underwriting stance is mainly open to neutral for the industry.