Construction Resilient Despite Some Recession Indicators

Commercial and residential construction continues to be strong.

Source : Freepik

April 21, 2023

Author : Alex Bustles

The Federal Reserve had spent months rapidly raising borrowing costs to control inflation. These moves were expected to slow growth and the labor market to the point where the economy would enter a downturn.

However, recession warnings are being reconsidered, but it’s far from being over. 

At Contractor News, we have been reporting how inflation, supply chain issues, and labor shortage have been crippling both residential and non-residential construction.

The US economy is strong but faces noticeable problems in the end of 2023 Q1. The labor market demonstrates that jobs are being produced (500,000 jobs were added in January), labor participation is flat (an increase from the steady decline we have witnessed), and trades are among the most active job markets. 

Despite multiple Federal Reserve interest rate increases, core inflation has yet to drop sufficiently. As a result, the Fed will continue to raise rates until inflation appears to be under control. 

According to the latest Bureau of Labor Statistics Producer Price Index (PPI) report the final goods and services prices decreased marginally throughout the month. The PPI rose 2.7% in March, slower than February's 4.9%. This has been the lowest growth rate since January 2021. 

The PPI tracks the average price change manufacturers and producers receive for the goods they sell over time. It tracks the price of items at various manufacturing stages and is a key indicator of inflationary economic pressures. 

The construction industry, which relies significantly on raw materials and suppliers, benefits from a drop in the PPI for final demand.

A drop in PPI will assist in reducing inflationary pressures. Although most prices continue to rise, they are doing so at a slower pace. Most have remained consistently high, except the lumber sector, which is leading the way in deflation. Softwood lumber, plywood, and hardwood lumber are down by 49.3%, 28.7%, and 14.3%.

According to Dodge Construction Network, the US financial system is generally healthy, but smaller regional banks may experience difficulties, and many have begun to tighten lending rules. These smaller banks are the lifeblood of the construction industry, lending to small-scale contractors and developers. If financing continues to tighten, many small businesses may find themselves in tough situations, potentially leading to a steeper drop in building starts.

As of 2022, over 6,900 projects have received funding through IIJA amounting to $186.3 billion. 

With public funding from the CHIPS, IRA, and IIJA legislations flooding the construction sector, larger projects may create a split market. Large manufacturing and infrastructure developments should be strong in 2023. As the year proceeds, small and medium construction project-dependent localities may suffer more.

Through the first two months of the year, non-residential building starts were 14% lower, with office, manufacturing, and education shining brightly in what was otherwise a dismal beginning.

In December of 2022 the year finished with a 27% gain in total starts value nationally. This was the concluding surge of a busy construction year. However, total starts dropped 27% in January 2023, resulting in an abrupt reduction.

“Commercial and multifamily starts across the top 16 metropolitan areas improved 30% in 2022, up substantially from 18% growth in 2021,” explained Sarah Martin, associate director of forecasting for Dodge Construction Network. “Overall, these top metropolitan areas saw impressive growth over the year, as demand for apartments, condos and commercial real estate returned to downtown urban cores – and brought sizable construction activity along with it.”

Category : Market Watch Material Costs

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