Fourth Quarter Construction Update: The Good, the Bad, and the Ugly
By Anirban Basu, Chief Construction Economist, Marcum LLP
Issue 42 – Fourth Quarter 2022
The construction industry faced many of the same headwinds that buffeted it throughout 2022 in the fourth quarter, including labor shortages, high interest rates, and elevated materials costs, but still exhibited a surprising amount of momentum. Nonresidential construction spending outpaced inflation both on a quarterly and annual basis, and contractor confidence and backlog improved. Despite the solid performance of late, the economy remains overheated, and that means the Federal Reserve will have to raise interest rates even higher than previously expected. The upshot is that economic momentum will fade as 2023 progresses.
Manufacturing-related construction remains the best performer among nonresidential construction segments. A combination of trade tensions, pandemic induced supply chain anxiety, and a resulting effort to reshore production has led to an array of massive domestic manufacturing projects. As a result, manufacturing-related construction spending is up 58.2% since the start of the pandemic, well above the 6.6% increase in overall nonresidential spending. Given the scale and anticipated duration of many of these large-scale projects, the segment should retain momentum throughout 2023.
The Federal Reserve has been raising interest rates since March of 2022 in an effort to limit demand and reduce inflation. While much of the economy has proved surprisingly resilient in the face of higher borrowing costs, the housing market has been brought to a virtual standstill. Permits for new residential construction were 27.3% lower in January 2022 than one year earlier. That’s largely due to falling demand for new single-family construction; permits for construction of new one-unit housing structures have now fallen in ten consecutive months. Given that existing home sales fell 38.1% during 2022, that should come as no surprise.
There was a moment in January when it looked like the Federal Reserve might just pull off a soft landing, wrangling inflation down from its four-decade high while avoiding a recession. At that time, the rate of price increases had moderated, and job growth, while still rapid by historical standards, had slowed in each of 2022’s last five months. Retail sales had declined in each of the year’s final two months, dipping to the lowest level since March 2022, and an array of indicators from the manufacturing sector indicated the kind of decline in demand necessary for inflation to fall back toward the target range of 2%.