The U.S. Federal Reserve’s interest rate increases this year have begun to chill the white-hot housing market. Current home loan rates hover around 7.2%, the highest level in 20 years, dampening consumer demand and producing a ripple effect in the construction industry.
Not only do the nation’s builders face a downturn in some housing segments, the Fed’s interest hikes also mean increased costs for construction loans to help purchase equipment and materials.
Based on past history, a leading indicator for future economic vitality is the construction market, which is also a major fleet buyer of pickup trucks and vans. If you look back in hindsight to the Great Recession of 2008-2009 one of the early indicators of the impending recession was a slowdown in sale of vocational vehicles.
So, here’s what are we seeing today:
- According to Moody Analytics, the economy is experiencing the fastest housing market contraction since 2006.
- Mortgage rates are up due to the interest rate hikes by the Federal Reserve and it is contributing to a 6% decline in home sales.
So the question is, how are these market dynamics impacting fleet activity in the construction industry?
The best source to get the pulse of the construction market in the U.S. is the Associated General Contractors of America, an industry association whose membership represents 27,000 companies.
Based on the association’s recent survey of its members, contractors say economic demand remains strong for non-residential projects and that there has been minimal impact on fleet acquisitions by construction fleets, which is good news for the fleet industry.
However, four big issues do confront construction fleets.
• First, the construction industry is experiencing supply chain constraints. It is taking longer to get materials in order to proceed with construction projects.
• Second, construction materials costs have increased more than expected. 84% of the survey respondents say that their costs are higher than anticipated. And these cost increases are being passed to their customers with 69% of the contractors stating that they are quoting higher prices into their bids and contracts.
• Third, these continuing cost and supply challenges are leading to more project deferrals. In fact, contractors state that 72% of the projects have taken longer to complete than anticipated.
• And fourth, construction companies are finding it difficult to hire enough workers. One reason for the staffing shortages is due to COVID because the construction industry has one of the lowest worker vaccination rates.
So while there are vulnerability to the construction industry due to higher interest costs and supply constraints, to date these concerns haven’t impacted the overall industry’s fleet acquisition patterns.
Nevertheless, the construction industry is a fleet segment to watch closely because it is one of the most vulnerable fleet segments to an economic slowdown. And, in many ways, the construction industry proverbial canary in the coal mine when it comes to forecasting future economic trends.
Fleet Acquisition Patterns
When examining the industry’s fleet acquisition patterns, there continues to be a high demand for full-size vans in the construction market, but there is concern about future product availability in particular the decrease in the number of choices of compact work vans, which are popular with many trade professionals and for fleets in general.
Let’s examine this concern in a little more detail. First, there are fewer compact van options available today and the fear is there may be even fewer options in the future.
- Nissan Motor Corporation ended production of their vans.
- Stellantis ended production of the ProMaster City.
- And the latest speculation now involves the Ford Transit Connect, which is today’s sales leader in the small van segment.
This speculation arose due to an article published in Automotive News, an industry trade publication, that Ford will end U.S. Transit Connect sales by the end of calendar-year 2023.
Currently, Ford imports the Transit Connect from Spain. According to the article, Ford will stop importing the current Transit Connect van from Spain by the end of calendar-year 2023, although the van will continue to be sold as a Europe-only model.
Now, this has not been publicly confirmed by Ford nor has it been publicly denied. Ford, along with all other manufacturers, have a long standing position not to discuss future product plans, but this story has now been picked up by a number of other media organizations in both North America and Europe.
But, if this is true, fleet managers are already grumbling that it will negatively impact their fleets because now they will have to transition to a full-size van, which not only increases their acquisition costs but also increases their operating costs because of higher fuel consumption.