How’s your savings account? It seems we’re all pinching pennies nowadays to keep up with the rising prices of goods and services.
Gas prices have never been higher, reaching a national average of $5.014 on June 15, a 49% increase compared to a year ago. Food is up 12% year over year, ending in May — the largest one-year increase since 1979. Used cars are up 16%, and home prices have risen 5.5%. Several of these percentages are sure to increase further, seeing that the feds just increased interest rates by 0.75%.
Unequivocally, inflation is running wilder than Hulkamania did in the 1980s.
So, while we’re all tightening our personal financial belts, how are your firms responding?
One industry organization, the American Council of Engineering Companies (ACEC), which bills itself as the oldest and largest business association of engineering companies in America, is not panicking. Despite growing concern, and perhaps the threat of a pending recession, the organization remains, in two words, cautiously optimistic.
Q2 Engineering Business Sentiment Report
The ACEC Research Institute examined the economy’s impact on the engineering sector through its Q2 2022 Engineering Business Sentiment report, a collection of responses from 600 engineering and design executives. The net rating system used in the report takes negative responses and subtracts them from positive ones to reach a numerical score ranging from negative 100 to 100 — the higher the number, the stronger the sentiment.
The institute’s Q1 survey found extreme optimism among engineering firm leaders both for their own financial pictures (+88) and the industry (+82). Fast forward and that optimism remains largely intact at +84 and +80, respectively, in Q2. However, growing concern over inflation and the health of the U.S. economy has weakened overall confidence.
Concerns about inflation increased significantly from +62 to +85, and future sentiment on the economy declined substantially by 26 points, standing at +16. Notably, smaller firms are seeing the greatest erosion of future business sentiment, with firms of 26-60 employees reporting the biggest drop in confidence.
“When we think about inflation, we think about all the different ways it impacts spending, but, from the perspective of an engineering or architecture firm, it affects the price of wages and the prices of offering a professional service as well as some of our business costs,” said Erin McLaughlin, vice president of market resources, ACEC, during a virtual roundtable discussing the Q2 Engineering Business Sentiment report. “Rising gasoline and fuel prices — especially if you're a firm that does a lot of site work or offers survey, geotech, or other kinds of work that's out in the field — are having an impact. While 70% of the U.S. economy is about consumer spending, rising prices have an impact on professional services firms, such as ours.”
Current sentiment remains very optimistic within all market sectors, although nearly half have had some decline in the past quarter. Sentiment is strongest in the water/wastewater (net rating +77) and roads and bridges (+76) sectors and weakest in residential real estate (+68) and telecommunications (+64), with both showing a drop of -4 and -5 points. Looking to the future, the largest change is in real estate with future sentiment for residential land development falling to -11 points and commercial real estate to -12.
“As far as our most recent data points, things are still going really, really well,” said McLaughlin. “Within the last week, the census released its quarterly professional services survey of different industries, and the AE [architectural/engineering] industry was up for the seventh straight quarter. AE revenues, in Q1 of 2022, were $104 billion. If we look back at the last full quarter before the pandemic, we see that we really just dipped that one quarter, and, then, all of that stimulus activity, the PPP [paycheck protection program] loans, and all of the other measures kept us on track. We've had a very, very strong growth pattern since coming out of the last recession.”
Median firm backlog has increased from 10 to 11 months, and 49% of responding firms report a backlog of one year or more. Fifty-four percent of respondents believe their firms will see an increase in backlog of projects over the next year, down from 66% last quarter.
Part of this may be due to the Infrastructure Investment and Jobs Act (IIJA) — a $550 billion investment into roads, bridges, storm water systems, and other essential infrastructure — which was passed by Congress last November.
“The impact of IIJA is already starting to be felt by firms,” said Joe Bates, researcher, ACEC Research Institute. “About one out of five firms are already reporting they're seeing work from the IIJA, and a total of around 80% say they expect positive impacts from the bill.”
Despite the promise of IIJA, workforce and staffing issues remain a concern for firms of all sizes. Seventy-three percent of respondents predict there will be an increase in hiring over the next 12 months at their firms.
“For smaller firms, those with fewer than 50 full-time employees, they're sort of maintaining the number of open positions they can create,” said Bates. “But, for large firms, those with 500 full-time employees or more, they're having a really hard time filling positions.”
“The number one concern of our members is workforce related, and where there's competition, there's price increases,” McLaughlin said. “Workforce issues really play into all of the other things we're talking about. It’s connected to inflation, prices, wages, and more.”
While costs are up, salaries at engineering firms are also increasing. The average salary for a new hire is up 10% over the past year, and it’s the smaller firms reporting the largest increases, as 31% percent of small firms (one to 25 employees) have increased salaries by more than 10%.
“Nine out of 10 respondents report that the average salary at their firms has increased in the last year,” said Bates. “That's the same, by the way, that we saw three months ago. However, three months ago, we saw an average employee increase in salary of around 5%. This quarter, salaries of new hires and existing staff are up well above that 5%. There is some fierce competition for talent right now.”
Are You Cautiously Optimistic?
How is the overall mood at your firm? Are you remaining “cautiously optimistic,” or are things trending more toward pessimism? Does your firm have any IIJA projects lined up yet? Have you received a pay increase in the 5%-10% range over the last year?
I’d love to hear your personal opinions on inflation, engineering salaries, or the state of the industry as a whole. Send your thoughts to me at firstname.lastname@example.org, and I’ll be sure to publish them in our next issue.
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