As the end of 2023 edges closer, experts shared their views on the state of the construction industry going forward. According to experts from the nation’s leading contractor associations, certain parts of the construction industry fixated on manufacturing and infrastructure will continue to see prosperity, while some challenges like labor shortages will still likely be universal in 2024.
Top economists from the Associated Builders and Contractors (ABC) of America and Associated General Contractors (AGC) of America had a mixed picture for contractors. Most construction sectors grew along with job openings and wage increases. The influx of federal money promised more infrastructure projects, but even those have strings attached. Meanwhile, office and multifamily construction growth slowed, with Wisconsin being an exception in some cases.
One thing the experts rejoiced about was the slowing of the Federal Reserve’s interest rates; in mid-December, Jerome Powell, chair of the Fed, announced rates would stay between 5.25% and 5.55%.
“It’s been brighter thanks to the excellent news about inflation at the producer and consumer level, and the [Federal Reserve] expectations for their interest rate targets,” said Ken Simonson, chief economist for AGC. “That’s been a pleasant surprise.”
Supply chain issues traded for financing woes
Contractors were less focused on woes with the supply chain since last year, dropping nearly 30 percentage points since September of 2020 compared to the final quarter of 2023, research by Baltimore-based Sage Policy Group showed. However, concerns over ability to finance projects have doubled since 2022, according to a recent poll.
This was a trade between the number of projects moving forward and the workers needed to build them, said Anirban Basu, who serves as both top economist for ABC and leader of Sage.
“What you’re sensing there is the market is starting to turn a bit. A small proportion saying we’ve got worker challenges and a higher proportion saying we’ve got issues with availability of financing for projects. Those things fit together. If projects aren’t moving forward, you don’t need as many workers and the worker shortage issue is not as great,” Basu said.
Manufacturing took the cake for construction spending in both Sage and AGC’s figures; Sage pinned spending in the sector for 164% growth since February of 2020. However, office construction only saw growth of 8% and multifamily housing permits skewed downward. Sewage and waste disposal, water supply and commercial construction remained king, evidence of federal infrastructure spending.
“If you’re along for these megaprojects, your economics are different from everyone else’s. If you’re dependent upon small, middle-sized private developers who historically developed office buildings, shopping centers and so forth, I think you’ll face more headwinds going forward,” Basu noted.
Labor availability, materials and the greater economy
Simonson named labor supply and quality the two things most mentioned by frustrated members, followed by worries of a possible recession and materials costs. It’s worth noting Simonson and Basu had different views on whether a recession will happen next year; Simonson didn’t think so, but Basu insisted it will happen.
“Most firms said they’ve seen great improvement in the supply chain and materials costs, while they didn’t come back to where they were before the pandemic, they certainly aren’t rising for most things. The one exception to that is electrical components, switchgears and transformers. The lead times are extreme,” Simonson added.
Wisconsin construction employment grew by 1.1% from October 2022 to 2023, which is behind the country’s 2.8% employment, according to AGC data. For comparison, Kentucky, Arkansas, Louisiana, Oregon and Wyoming had leading employment growth.
“We think the percentages would be higher in many places if there were enough qualified applicants. It’s not necessarily the demand for workers is less in Wisconsin, but it may be harder to fill positions there,” Simonson said.
Simonson said he thought construction employment would continue to grow, but contractors would likely pay more for labor. The average hourly earnings for production and nonsupervisory employees went up 5.9%, according to the U.S. Bureau of Labor Statistics. It’s gone up consistently month over month, and Simonson predicts the trend will continue as contractors look to fill positions.
The indexed average for cost of materials and related trucking services has been about flat in the last few months, but customers reported increases for certain types of steel, structural rebar and plumbing parts.
“This might be a harbinger of what we may see next year,” Simonson said. “I’m telling contractors to brace for possibly 4 to 6% increases of material costs overall. That hasn’t been the case lately and I’m hoping the good fortune will last, but I think it’s prudent to a resumption of cost increases,” he added.
There’s been a huge interest in datacenters partly driven by interest in artificial intelligence, Simonson said. There’s also a drive for large manufacturing plants for products such as semiconductors, electric vehicles and batteries. Companies may also be looking to re-shore away from conflict zones, supply chain snags or are following the carrot-and-stick of federal funding, he added.
Construction of single-family homes also carried momentum for the new year, as Sage data showed an uptick of nearly 1,000 single-family home permits in 2023. However, multifamily permits across the U.S. lagged compared to previous years at just above 400 permits.
However, Wisconsin was one of the only states that picked up more multifamily permits this year, according to the National Association of Homebuilders. Danushka Nanayakkara-Skillington, the association’s top economist, put the Badger State up with states such as Pennsylvania, Indiana and Tennessee that granted more multifamily permits.
Economists at odds on possibility of recession
Economists seemed cautiously optimistic about construction in 2024 but were at odds on the direction of the general economy. At the end of his presentation, Basu remarked the economy would get worse before they got better and listed the previous Federal interest rate as a driver.
“Basing to an extent on poll results, you don’t need to be from Baltimore to be pessimistic,” Basu said, insisting on his belief a brief recession was on the horizon.
Simonson noted more consumers had more purchasing power, based on employment and real wages rising month over month. Wealth increases for homeowners and stockholders were also evidence for Simonson’s hypothesis for a stronger economy.
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