US Construction Market Report 2Q 2023
Wider economy
Recessionary threat
Once again, economists are sounding alarm bells over an imminent downturn and forecasting a recession for the second half of 2023.
For over a year, forecasters have warned of an impending slump; however, the economy has remained relatively strong and resistant to decline.
The Federal Reserve has raised interest rates higher and quicker than it has for decades, which is cause for concern along with tightening credit conditions and availability.
Some consider the ongoing US regional banking crisis to be an early warning of stress on the system.
Survey results from the Federal Reserve in April 2023 on bank lending practices indicated that lenders are responding to bank collapses by stiffening their standards, as the demand and supply of loans approaches levels not seen since the 2008 crisis.
With interest rates continuing in an upward trajectory, analysis for The Economist estimates that deficits could reach 7% of American gross domestic product per year by the end of the decade. Worryingly, these levels are only familiar in times of war and economic slumps.
Overall, the concerns of inflation remaining high, interest rates being unlikely to be cut any time soon, as well as the continuing tightening of credit conditions, are all sparking fears of a looming recession.
Consumer price inflation
Inflation rose by 0.4% in the month (seasonally adjusted) and 4.9% in the year to April 2023 (unadjusted).
The annual rate of 4.9% was the lowest level seen since April 2021 and slightly better than forecasted, as economists had expected it to remain steady at 5%. However, it remains higher than the Federal Reserve’s 2% annual target for inflation.
Annual core inflation (all items less food and energy) was 5.5% and has barely moved since the end of 2022, remaining stubbornly high.
Labor force and job openings
Data from the US Bureau of Labor Statistics shows that job growth is slowing but remains resilient despite the challenges. The latest release shows that nonfarm payroll employment rose by 253,000 in April — compared with the average monthly growth of 290,000 over the previous six months. The unemployment rate showed little change at 3.4%.
Job openings are beginning to taper off. In March, the number of jobs available dropped to 9.6 million, the lowest figure since April 2021. However, the release also shows that 5.3 million people are seeking employment, meaning there are 1.8 jobs for every unemployed person looking for work.
The Federal Reserve has tried to slow the job market as rising labor costs can influence inflation. Improving the labor force participation rate is a way to address tightness in the labor market.
Given efforts to slow the economy, the continuing strength in the job market may seem surprising. However, the impact of COVID-19 remains evident, with some industries still facing a shortfall of workers after employees left their positions or were laid off at the height of the pandemic.
If the economy slows, the job market is likely to weaken. Interest rate increases take time to trickle through the economy, meaning the number of new jobs created may slow over the coming months.
Interest rates
To combat inflation and to meet its 2% target, the Federal Reserve has increased interest rates 10 times in 14 months, with the latest increase bringing rates to their highest level in 16 years.
There is uncertainty about whether interest rates will rise further, with a balancing act underway regarding the effect of past hikes in borrowing costs, recent bank credit tightening and difficulty taming inflation.
Impact on construction
Wider economic conditions continue to impact on the construction industry. The potential for recession and uncertainty of a weakened economy could lead to decreased investment in construction projects, as smaller banks often provide credit to contractors and loans to developers. If credit conditions continue to tighten, it could lead to a pullback in construction starts.
A survey conducted by the Associated General Contractors of America and Sage found that only a third of respondents reported that they had no projects postponed or canceled in 2022 and 13% of firms have already experienced a canceled or postponed project set to begin in early 2023. The main reason for cancellations and postponements was rising costs — for construction, financing, insurance, etc. — cited by nearly half of the contractors who responded to the survey.
However, Associated Builders and Contractors (ABC) analysis shows that non-residential construction activity has remained at a high level despite elevated construction and borrowing costs. Its Construction Backlog Indicator increased to 8.9 months in April from 8.7 in March, with strength in the infrastructure category.
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