US Construction Market Report 3Q 2023
Wider economy
Fears held earlier in the year that a recession would materialize in the US economy are beginning to subside as inflation seems to tentatively come under the Federal Reserve’s control.
The Federal Reserve applied brakes to the economy by slowing inflation, which soared to a 40-year high last year, with interest rate hikes that avoided sending the economy into negative growth.
August’s Consumer Price Index report shows a second consecutive month in which US headline inflation and core inflation rates have accelerated, following a gradual period of deceleration from mid-2022 to July of this year.
Since March 2022, interest rates lifted from near-zero levels to upwards of 5% in a bid to cool inflation and bring it back to the central bank’s 2% target.
According to the Federal Reserve Bank of New York, one-year forward inflation expectations fell to 3.6% in September, down from the 6.8% recorded in June 2022.
While the demand for labor is still strong and has buoyed economic growth, the signs are that it is continuing to moderate across the world’s largest economy.
As labor supply and demand reach more of an equilibrium, the chances of wages rising and pushing inflation higher look less likely, with the Federal Reserve aiming for a ‘soft landing.’
Although some uncertainty remains, the signs are that the current monetary policy tightening cycle could be nearing its conclusion.
Consumer price inflation
In August, the Consumer Price Index for All Urban Consumers increased by 0.6% (seasonally adjusted) and rose 3.7% over the last 12 months (unadjusted). This marks a notable surge compared to July’s 3.2% and June’s 3% reading and indicates the broader impact of rising costs on consumer budgets.
The index for all items less food and energy rose 4.3% over the year (unadjusted).
Labor market
Data from the US Bureau of Labor Statistics shows that job growth continues to slow. The latest release shows that total nonfarm payroll employment increased by 187,000 after the prior two months were revised significantly lower — but less than the average monthly gain of 271,000 over the last 12 months.
The unemployment rate rose to 3.8% — up 0.3% for the month but little change from a year earlier at 3.7%.
Construction employment continues an upward trend with a rise of 22,000 in August — in line with the average monthly gain of the last 12 months at 17,000.
Within the industry, employment continued to trend upwards over the month in specialty trade contractors (+11,000) and heavy and civil engineering construction (+7,000).
Labor Department data showed that job openings dropped in July to the lowest level in over two years. According to the Job Openings and Labor Turnover Survey released in August, the number of job vacancies in July lowered to 8.8 million, down from 9.2 million in June.
Central bankers are likely to be encouraged to see more people entering the labor force, which in turn can help soften wage pressures. The overall participation rate — the share of the population working or looking for work — rose for the first time since March to 62.8%, marking the highest level since February 2020.
Meanwhile, officials at the Federal Reserve have reported moderating inflation and growth slowing slightly in its latest ‘Beige Book’ summary of surveys and interviews conducted across its 12 districts up to August 28. Nevertheless, enough economic activity was mooted to mitigate near-term recession concerns.
The report noted that housing supply remains constrained. Home building is picking up, but high financing costs and insurance premiums are hindering affordable housing development.
Interest rates
A cooling US job market allows the Federal Reserve to pause interest rate increases this month while keeping options open for another rate hike later in the year.
The Federal Reserve raised its benchmark rate in July to a range of 5.25% to 5.5%, equaling a 22-year high, and their most recent projections had one more rate increase penciled in for 2023.
Impact on construction
According to figures from the Department of Commerce, construction spending increased 5.5% on a year-on-year basis in July, with investment in residential construction advancing 1.4% after rising 1.5% in the prior month. Developers are addressing the shortage of houses on the market, which boosted outlays on single-family housing projects in particular.
However, high mortgage rates could still stifle further activity by creating a smaller pool of buyers. Applications for new mortgages have plummeted to their lowest level since 1996.
The construction spending report showed outlays on multifamily housing projects gained just 0.2% in July, as gains in this subsector are plateauing with stock of multifamily housing under construction at a record high.
Despite expectations that economic pressures would dampen construction activity, the Associated Builders and Contractors (ABC) Construction Confidence Index reading for sales, profit margins and staffing levels remained above the threshold of 50 in August, indicating growth expectations over the next six months.
ABC’s chief economist, Anirban Basu, said, “There’s no sign of a construction recession in the near-term. If anything, contractors are more upbeat, as policy and technology shifts along with economic transformation, are creating substantial demand for improvements and growth in America’s built environment.”
Basu added that incremental improvement in sales, profit margins and staffing over the next six months is remarkable in the context of tightening credit, higher project financing costs and lingering fears of recession.
Georgia State University’s Convocation Center, Atlanta, Georgia — Gleeds provided Program Management and Cost Management services.
