The Construction Industry and Tracking the Trends of Economic Growth

The two-handed economist is preeminent today because certain market sectors are booming while others are in recession. Staying on track can be difficult. Residential single-family housing is in a recession, but it’s a booming manufacturing sector for chip manufacturers and battery plants. Roads and bridges are full-steam-ahead in many states while the commercial development market deteriorates. Some economists have termed this situation a “rolling recession,” with highs and lows co-existing. The challenge is to take advantage of the robust market sectors projected to remain strong.

TRAIN OF THOUGHT ON ECONOMIC GROWTH

There are two questions regarding economic growth in 2023, first, ‘is there going to be a recession’, and second ‘how sticky is inflation going to be?’

Technically, we are not in recession, having posted 1.3 percent GDP growth in the first quarter. The Federal Reserve Bank (FED) is attempting to quell inflation by raising the Federal Funds Rate (FFR) which could push U.S. into recession or stagflation. Wages have not kept up with inflation for the last two years. The resiliency of the economy up to this point is a result of massive amounts of liquidity in the market. For example, the Biden Administration passed over $5.0 trillion in spending packages which is now being infused into the economy.

The Consumer Price Index (CPI) offers good news currently 4.9 percent down from 8.5 percent in August 2022. The Producer Price Index (PPI – wholesale prices) posted 2.3 percent in April, down from its historic high of 11.3 percent in July 2022. The inputs to Construction PPI have reached 4.9 percent from 11.3 percent in July 2022. Interestingly, the PPI Bid Price for Construction Services remains high at 17 percent, but this number will come down quickly this year given the market conditions. But the FFR in March was 4.75 percent after ten straight interest rate hikes. Even with this massive intervention by the FED, the FFR rate will likely exceed the FFR target of two to 2.5 percent. This could initiate more rate hikes from the FED for inflation to go no lower than between four to six percent.

Congress passed the Chips and Science Act, which provides $52 billion in subsidies to support semiconductor manufacturing, and thus we are seeing a boom in these technology sectors in the U.S.

On the energy front, WTI Crude is currently at $70.14 per barrel. Natural Gas is stabilizing to $2.10 per MMBtu, which is good news. The average American experienced more than 8 hours of outages in 2020 and still does today according to the U.S. Department of Energy. Outages are caused by weather and outdated power infrastructure. The worst states in terms of number of outages per year are California, Texas, New York, Michigan and Washington State.

THE CONSTRUCTION INDUSTRY

A trailing indicator in the economy, Construction has not been impacted by the slowing economy as of Q1 2023. The continued demand for construction services is expected to grow in 2023 from a robust growth in construction starts in 2022. FMI forecasts construction spending, non-residential will be up 8.0 percent year-over-year in 2023. 

Construction firms are turning their sights on publicly funded projects, massive technology projects, multi-family housing and renovation work. However, the Non-Residential Construction Index (NRCI) score of 46.4 in January suggests ongoing concerns for construction due to the slowing economy.

CONSTRUCTION INPUTS

The AGC issued another Construction Inflation Alert in December 2022, but inputs have dropped precipitously. The Producer Price Index for construction inputs (material and equipment) is currently at 4.3 percent, having reached 20.2 percent a year ago. Interestingly, the PPI Construction Bid Price is currently at 17.3 percent year-over-year indicating a persistent inverted curve. Construction bid prices are expected to drop in the second half of 2023 and even more during 2024 as the potential recession deepens. The only factor that may keep bid prices for construction elevated is the continued shortage of skilled labor.

LABOR 

According to McKinsey, “the U.S. has a construction labor shortage that will likely get worse. In April, the U.S. construction industry had roughly 440,000 job openings.” The industry only added approximately 240,000 workers in 2022. Labor shortages run across all industries. For example, manufacturing in the U.S. has more than one million openings. McKinsey shows the labor required to staff the Bipartisan Infrastructure Law (BIL) alone needs 300,000 construction workers in 2027/28. The bottom line, our Country needs a national, comprehensive labor strategy for success. The industry needs to promote, subsidize, and train future workers for all trades engaging with trade schools, colleges and universities. Out of necessity, construction companies are investing in training skilled labor by collaborating directly with high schools, trade schools and community colleges. Christman expects this trend to continue. 

IN SUMMARY

The non-residential design and construction industry will enjoy growth opportunities in 2023 and 2024, driven by government stimulus and growth in the technology sector. Look to chip and battery manufacturing, and the need to renovate and repurpose older buildings. With labor shortages in the U.S., the companies that hire the best people will win. The engineering and construction industry survived the pandemic and is proven to be resilient. Most firms are realistic and anticipate a slow-down and a possible recession. 

The AIA Billings Report indicates a drop in billings, and consumer sentiment surveys indicate that a recession could happen later this year. The good news for owners is that relative to last year, the rate of increase on the cost of construction has slowed and renders more projects feasible for construction.

We continue to see a tremendous demand for economic data from builders, architects, and engineers, and of course our customers. We are pleased to offer the fifth edition of The Essentials in an economic environment like no other in recent history.