Supply disruptions and inflation from COVID lockdowns, more disruptions and inflation from the war in Ukraine, high-priced gasoline, higher truck prices due to microchip shortages, and increased wages to cope with the higher prices resulting from all of the above are pieces of the economic storm we’re in. What’s a construction business to do?

We’re at a point when we have to pass along price increases for materials and consider higher wages for employees, knowing they’re paying more at the pump and the grocery store. The temptation is to raise our prices. By doing so, however, we enter the vicious spiral in which our response exacerbates the original problem. Raising prices excessively to combat inflation eventually reduces demand and exacerbates recessions. It’s possible the Federal Reserve can stem the effects of the recession by raising interest rates and tightening monetary supply, but don’t count on it—not because it’s the government, but because it’s a difficult task.

Even if the Fed can engineer a “soft landing”—avoiding the severe downturn and long-term recession—there may be serious consequences. Raising interest rates and reducing stimulus can decrease demand for goods and services and cause asset deflation. Higher rates discourage borrowing, which means fewer homes (new and old) and remodeling projects are sold. With asset deflation, the stock market and housing markets lose value, and spending is curbed because people feel like they have less money. We have seen stock prices plummet between 10% and 25%. Is housing next? The interest rate on a 30-year-fixed-rate mortgage is now 6.25% (as of this writing), not unreasonable historically but high when applied to all-time-high housing prices. The Mortgage Bankers Association reported in September that mortgage applications were down 14%. Housing prices may be coming down, but then longtime homeowners will feel they have less money, recent buyers may end up with homes worth less than the purchase price, and people looking to buy may not know what to do. Demand destruction in housing could be a kick in the teeth for the residential construction industry.

For those of us in construction and remodeling, with continued inflation, we get hurt; with reduced inflation (reduced demand) without a recession, we get hurt; and with reduced inflation with a recession, we get hurt. Employment is high, unemployment is low, and households have cash, so there is hope. But, even so, what do we do when we may get hurt no matter which scenario plays out?

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