As a firm, we bristle with optimism. Yes, sometimes it gets tempered when things aren’t going so well in our industry or the economy as a whole, but those setbacks tend to be short-lived. Of course, we missed the timing on what turned out to be a painfully long Great Recession, which will go down in the history books as the worst since the Great Depression of the 1930s. It proved to be an almost-decade-long setback for our industry that took its toll on volumes—and some individual companies that didn’t make it through.
But today, coming out of the Covid-19 pandemic, there could not be more optimism about what lies ahead for our industry. Sure, there are challenges like spot material shortages of all types, and the never-ending issue of attracting a full complement of workers to our businesses. But in my mind, these are good problems to have, not bad. We forget the pain of falling volumes, forced layoffs, and other painful contractions that came about in the years leading up to the current boom, and they have been replaced by problems that are good to have.
Our near-term optimism has not faded; we continue to remain bullish about our industry, at least for the next couple of years, as we begin to reap the benefits of the Infrastructure Investment and Jobs Act and the $1.2 trillion it will pump through the nation’s construction economy. But make no mistake, we are watching three pressure points very carefully, any one of which could dent the current boom: inflation, gas pump pain, and Putin.
The current round of inflation, an economic setback that we haven’t experienced since the 1980s, was driven by the pandemic. A combination of liquidity in our system driven by stimulus and PPP money, along with the demand that drove an already-disrupted supply chain to chaos, has ignited inflation for the first time in 40 years. The Fed now must battle this balloon in prices that threatens our economy with yet another risk: rising interest rates. Our hope is that Fed Chairman Powell can find the Goldilocks solution and get it just right. If it works, inflation will moderate to the Fed’s 2 percent target, and interest rates will temper.
I like to point out that the price window on the gas pump is the single biggest factor in unnerving consumers. They may not see a few-cent increase in lettuce or milk at the supermarket, but the price of a gallon of gas hits us all right between the eyes, and can really drive consumer sentiment downwards, as we try to process $4- and $5-a-gallon gas prices. This gas pump pain simply reflects the current inflationary cycle, exacerbated by the Russia/Ukraine conflict and the disruption of Russian oil and gas supplies to the West. But remember, gas prices were on the rise before the war broke out, and if a resolution occurs and the fighting stops, normalized oil and gas markets will only move just so much. Global demand could outstrip supplies for some period of time, keeping oil prices above normal and posing a threat to our economy.
Russia President Vladimir Putin is another wild card. It is apparent the Ukrainian army and even its own citizen militia have dug in their heels and are posing a much tougher adversary than the Russians ever dreamed of. Putin thought the war would result in a surrender within a few days, which he grossly misjudged. The war has become the central focus of news coverage, rendering our pre-occupation with the progress we are making on the recovery from the Covid-19 pandemic to the media’s third-row seat. But as I have expressed in presentations around the industry in recent weeks, I expect a boomerang effect on our economy when the war is resolved, as was the case after the Gulf War, SARS, and 9/11. Watch stock market indexes recover and sentiment rebound when the conflict comes to an end.
Any of these three pressures could tilt us to an economic slowdown, but with the current ultra-low unemployment combined with an expanding GDP, I say our optimism prevails.
Pierre G. Villere serves as president and senior managing partner of Allen-Villere Partners, an investment banking firm with a national practice in the construction materials industry that specializes in mergers & acquisitions. He has a career spanning almost five decades, and volunteers his time to educating the industry as a regular columnist in publications and through presentations at numerous industry events. Contact Pierre via email at [email protected]. Follow him on Twitter – @allenvillere.