Recessionary conditions likely in next year
- Weakening global and national economies, mixed with high borrowing costs and excess inflation, suggest recessionary conditions will prevail at some point over the next 12 months, said Anirban Basu, chief economist at Associated Builders and Contractors, during a construction economic update webinar Wednesday.
- Some segments stand to hold up better than others, such as public construction, manufacturing projects, data centers, grocery stores and multifamily housing, said Basu.
- “One of the factors driving construction costs is obviously lack of a skilled workforce, and as far as I can tell, it’s getting worse out there,” said Basu. “As we try to rebuild our supply chains, rebuild our infrastructure, costs are set to go higher because human capital is so scarce.”
Nonresidential construction spending has surged over the last year, only falling once on a month-to-month basis in the past 11 months, according to an ABC analysis.
“The construction industry is an interest-rate sensitive segment of the economy, and that’s one of the reasons I’ve been surprised that construction spending has still been so aggressive because project financing is so much more expensive than had been the case,” said Basu during the webinar. “The economy continues to demonstrate a resiliency that I would not have anticipated.”
But Kermit Baker, chief economist for the American Institute of Architects, recently voiced concerns of an impending slump during the second half of the year regarding construction spending. Basu expressed a similar sentiment, especially since those numbers have not been adjusted for inflation.
Even thought broader gains have been impressive, excluding the white-hot manufacturing building segment, nonresidential construction spending is barely outpacing inflation, up just 6% over the past year, said Basu.
“Much of the growth in construction spending is not because the industry is delivering more service, it’s because it’s charging more for the service it delivers,” said Basu. “Construction volumes look very much like what they looked like pre-pandemic. [That suggests] the U.S. is delivering the same level of service with more workers.”
Inflationary pressures linger
Due to unfilled job openings in construction, contractors need to ensure, in addition to their hiring efforts, that they also keep their existing workers on staff. That means more raises and bonuses, which drives up the cost for human capital. That then drives up the cost for goods and services, said Basu.
Additionally, construction materials remain expensive compared to pre-pandemic conditions, according to ABC analysis. For example, after a brief drop in the second half of 2022, steel prices came under renewed pressure in the first half of 2023.
At the same time, cement prices have also continued to increase in recent months, said Chris Delaney, commercial manager in the Americas division at construction consultancy firm Linesight.
That dynamic could influence the Federal Reserve to raise interest rates again in the short-term in addition to yesterday’s quarter point increase, said Basu, in order to tame inflation concerns.
“The majority opinion appears to be that the Federal Reserve, after Wednesday’s rate hike, is done. I’m very much in the minority on this,” said Basu. “I think the Federal Reserve might have some more work to do.”