Q3 2022 Market Update – Industrials & Manufacturing

I&M Q3 2022 Market Update

G2 Capital Advisors is pleased to present its Industrials & Manufacturing industry update for Q3 2022, providing commentary and analysis on M&A and market trends within the Industrials & Manufacturing sectors.

A historic, $1.2T of funding has been approved to invest in aging infrastructure nationwide through the Infrastructure Investment and Jobs Act (“IIJA”), coupled with additional investment of $52B through the CHIPS Act and $700B through the Inflation Reduction Act. Construction services firms have been buoyed by the news of the injections, promising years of bumper backlogs and a reliable end customer in the U.S. government. Unfortunately, new investment can’t conjure up a much-needed base of skilled laborers, as the war for talent rages on. Only 80% of the 1MM construction workers who lost their jobs at the beginning of the pandemic have returned, in the face of an estimated 1MM additional workers required in the near term to keep up with high demand. Firms have been forced into bidding wars and are providing more clearly defined career trajectories to attract new workers. As the U.S. hovers over a recessionary state, pressure on wage growth should ease more broadly, but will likely remain an acute issue for the construction services industry as demand is supported by government policy. With spending under the infrastructure law expected to peak in 2027-28, the labor strain is set to become a longer term, structural issue.

The $700B Inflation Reduction Act includes a rejuvenated solar power incentive, increasing the existing tax rebate from 26% to 30% for a period of ten years through 2032. Originally scheduled to phase out between 2020 and 2023, the reboot will be partially financed by a 15% alternative minimum tax on some large U.S. corporations and a 1% excise tax on certain corporate share repurchases. The Biden administration aims to further increase investment and development of renewable energy alternatives, providing a significant boon to developers and investors. This backdrop of robust demand has allowed firms to pass inflationary pressures on to end customers, offsetting the impact on their businesses.

While demand for the construction services and renewable energies sectors will remain robust, supported by extraordinary government funding, industry players will need to combat persistent labor shortages likely to endure through a forecasted recession.