June 1, 2023

First Quarter Construction Update: The Good, the Bad, and the Ugly

By Anirban Basu, Chief Construction Economist, Marcum LLP

First Quarter Construction Update: The Good, the Bad, and the Ugly Construction

Issue 43 – First Quarter 2023

After a year of steady, albeit downbeat, economic dynamics, conditions are beginning to change. While many of the same challenges remain in place, including inflation and labor shortages, the construction industry now faces the cumulative weight of ten consecutive interest rate increases and tighter credit conditions due to fallout from the banking crisis. Even as inflation begins to subside, higher borrowing costs and what many expect will be a weakening macroeconomic environment pose substantial risks to the construction industry throughout the remainder of 2023.


The Good
Manufacturing-related construction continues to outpace all other segments due to elevated reshoring activity and the CHIPS Act. Spending in the segment is up 90.2% since the start of the pandemic and accounted for the entire increase in non-residential spending observed in March. Given the scale and anticipated duration of many of these large-scale projects, the segment should retain momentum through the remainder of the year.

The Bad
Commercial construction spending surged 53.3% between the cyclical low point in August 2020 and the end of 2023, and that momentum was in large part due to an increase in construction of warehouses and fulfillment centers (the Bureau of Economic Analysis defines commercial construction as retail, food/beverage outlets, car dealerships and service centers, warehouses and fulfillment centers, and farms). That momentum dissipated in the first quarter of 2023, however, and spending in the segment has declined by 4.8% over the first three months of the year. With interest rates elevated and credit conditions tightened by the banking crisis that began in early March, commercial-related construction spending will likely soften over the remainder of 2023. 

The Ugly
The Federal Reserve decided to raise interest rates by another 25 basis points on May 3rd, bringing the target range of the federal funds rate to 5-5.25%, the highest level since 2007. The Federal Reserve began tightening monetary policy back in March 2022 in an effort to suppress excess inflation, and they have now raised rates by at least 25 basis point at each of their past ten meetings.

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