February 27, 2024

Fourth Quarter Construction Update: The Good, (The Strictly Okay), The Bad, and The Ugly

By Anirban Basu, Chief Construction Economist, Marcum LLP

Fourth Quarter Construction Update: The Good, (The Strictly Okay), The Bad, and The Ugly Construction

Issue 46 – Fourth Quarter 2023
Neither the construction industry nor the broader economy was projected to have a particularly good 2023. Those projections proved extraordinarily incorrect. Despite a majority of economists predicting a recession would occur at some point during the year, the economy grew at an impressive 2.3% annual rate, the unemployment rate remained below 4%, and inflation plummeted to a level just above the Fed’s 2% target rate. 

Despite severely elevated interest rates, construction activity accelerated in 2023, with infrastructure- and manufacturing-related projects leading the charge. The industry enters 2024 with ample momentum, yet headwinds remain in the form of elevated borrowing costs, labor shortages, and weakness in certain subsegments.


The Good

Manufacturing Construction
Manufacturing-related construction continued to surge in the fourth quarter, with spending in the segment rising another 5.2%. Due to the Inflation Reduction Act, the CHIPS Act, and the private-sector desire to reshore capacity, spending in the category is up more than 186% over the past three years. While some of these megaprojects have stalled due to demand concerns and worker shortages, manufacturing-related construction spending will remain elevated throughout 2024.

The Strictly Okay

Interest Rates and Inflation
Inflation declined markedly in 2023, falling from a peak of a 9.1% year-over-year rate in June 2022 to a far more manageable 3.4% year-over-year rate in December 2023. While that’s still well above the federal reserve’s 2.0% target rate of inflation, it’s close enough that—barring an unforeseen setback—the target range of the federal funds rate won’t be raised again this cycle.

The Bad

Commercial Construction
Commercial construction spending fell more than 2% during the fourth quarter of 2023 and increased just 1% over the entirety of the year. That’s in nominal terms, so after accounting for inflation, investment in the segment actually declined in 2023. The recent lack of momentum is largely due to cyclical factors in the distribution space. Warehouse-related construction spending increased about 830% over the past decade, and now accounts for over half of all commercial-related spending. Due to inventory cycles and surge of investment in e-commerce capacity during the pandemic, investment in that category softened in 2023. Meanwhile, demand for more traditional commercial space (think retail and food services) remains subdued due to changing demands for space, the increased prevalence of eCommerce, and high borrowing costs.

The Ugly

The economic outperformance that characterized 2023 appears to have carried over into 2024. While the expectation is that growth will slow this year, the consensus forecast now has the U.S. economy avoiding recession. Given the spike in inflation and subsequent rapid increase in interest rates seen over the past few years, a soft landing would represent a truly remarkable outcome.


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