Second Quarter Construction Update: The Good, the Bad, and the Ugly
By Anirban Basu, Chief Construction Economist, Marcum LLP
Issue 40 – Second Quarter 2022
The Marcum Commercial Construction Index for the second quarter of 2022 reports that the construction industry continues to face rising costs and shortages of both labor and materials, but now also must contend with a weakening economy and elevated borrowing costs.
Notably, the residential sector has weakened significantly, while the outlook remains dicey for the nonresidential sector.
For years, the strategy among American manufacturers was to offshore as much production as possible. After all, Asian and Latin American nations offered lower wages and cheaper land, and they often implemented less stringent environmental standards. To be a profit maximizer one must be a cost minimizer, and offshoring represented a logical approach.
Not so long ago residential construction activity was firmly ensconced in the “good” category, but that was before March, when the Federal Reserve began to raise borrowing costs by tightening monetary policy. Since then the Federal Reserve has further expanded rates, helping to produce meaningfully higher mortgage rates.
Nonresidential construction spending declined 0.5% in June 2022, the most recent month for which data are available. Spending is up just 1.2% over the past year in nominal terms, which means that spending has declined meaningfully in real terms given a concomitant increase in materials prices exceeding 20%. Another measure of construction spending, investment in nonresidential structures (a component of gross domestic product), contracted at an 11.7% annual rate during the second quarter of 2022 and has now declined during 10 of the past 11 quarters.