According to Loretta Mester, president, Federal Reserve Bank of Cleveland, the United States should avoid an economic recession as the Fed tightens policy. However, Mester says the inflation rate will probably remain at more than 2 percent into next year.
The Fed’s 2-percent inflation target is based on the personal consumption expenditures price index which rose 6.4 percent in the 12 months through February.
The United States inflation rate is currently at 7.87 percent (April 11, 2022) compared to 7.48 percent last month and 1.68 percent last year.
Moreover, estimates are that inflation rose at an annual rate of 8.4 percent in March. Consequently, economists such as Larry Summers believe we may already be at the beginning of a recession.
According to the Fed, elevated inflation has been driven primarily by supply chain disruptions and pent-up consumer demand for goods following the reopening of the economy in 2021.
However, pent-up demand apparently has been a blessing for the car wash industry. According to an update of the list of the top 50 U.S. car wash chains, one consultant described the 2021 growth trends in the industry as incredible.
Trends were described as increases in year-over-year new-build growth, more mergers and acquisitions, greater wash volumes, and higher valuation multiples.
The principal driver of these trends was described as an increase in consumer demand, growth of subscription programs, and continued investment by private equity firms.
Back to the downside, the increased cost of everything.
For example, the Mortenson Cost Index for non-residential construction showed an increase of 2.9 percent nationally in the first quarter. Turner Building Cost Index for non-residential construction materials rose by 5.04 percent during 2021.
According to Turner VP Attilio Rivetti, “While some material prices appear to show signs of leveling, there is continual escalation in steel, copper, and aluminum prices.”
According to ConstructConnect, construction companies also had to deal with continuing labor shortages, rising wages, and issues with getting building materials delivered on time due to supply issues.
Data from the BLS shows average hourly wages in construction were up 4.6 percent for all employees in 2021. The data also shows there are more than 300,000 job openings in construction.
Preliminary data shows inputs to new construction were up 20.5 percent from a year ago and final demand construction was up 12.3 percent from a year prior.
Table 1 contains construction cost per square foot for a one-story retail building in select cities by region (source; Cummings Insight). Cost excludes land, professional fees, permits, FF&E, and soft cost.
Data from Auto Laundry News surveys shows the amount operators say they are spending on new tunnel construction continues to rise (see Figure 2).
Since 2013, our records show total project cost has increased by around $1.0 million with building construction representing the bulk of this increase.
Although some of this is due to operators building larger sites on more expensive real estate, building and equipment quotations show notable increases in cost.
For example, several years ago, the typical installation free for a conveyor was in the range of $75,000 or so whereas today bids are as much as $125,000.
Producer prices for soaps and detergents have also increased.
A producer price index is a price index that measures the average changes in prices received by domestic producers for their output.
According to FRED economic data (St. Louis Federal Reserve Bank), the producer price index by commodity for chemicals and allied products increased by 7.0 percent from 249 in 2021 to 267 in 2022.
Data from Auto Laundry News tunnel surveys shows an upward trend in variable costs to clean a car (see Figure 3). Since 2013, the data suggests unit variable cost increased by about $0.30.
In the final analysis, it’s no wonder operators are placing a lot of emphasis on monthly unlimited and the increased wash volumes and the recurring revenue it generates.
Likewise, is the emphasis on revenue optimization via online products and improved marketing such as vibrant signage, LED lighting, and iconography.
All of which are important to help ensure projects pencil out as expected in the future as costs continue to rise.