Fourth Quarter 2022 Marcum Construction Index: The Good, The Bad, and The Ugly
MARCH 9, 2023 (New York City, NY) – The Marcum Commercial Construction Index for the fourth quarter of 2022 reveals that the construction industry retained momentum at year’s end despite an array of constraints facing the industry, including labor shortages, materials costs, and severely elevated borrowing costs. While some construction segments have fared better than others, an overheated economy and gloomy economic outlook will eventually begin to drag on the industry.
The index is produced by Marcum’s National Construction Services group.
Labor shortages remain the most pressing issue for the construction industry. “As was the case throughout all of 2022, the construction industry continued to be defined by high demand for labor but a pervasive shortage of workers,” said Anirban Basu, Marcum’s chief construction economist and author of the report. “As a result, construction wages are rising at a much faster rate than wages in all industries, further contributing to already-elevated construction costs.”
Material prices rebounded at the start of 2023, but the moderation in input price escalation observed across much of 2022 is likely here to stay. “Unfortunately, input prices rebounded in January, increasing 1.3%, the largest monthly rise since June 2022,” Dr. Basu said. “Still, the 4.9% year-over-year escalation in input prices is the lowest since the beginning of 2021, and the worst of materials price increases appears to be firmly in the rear-view.”
As the economic environment weakens, Dr. Basu expects some segments to fare better than others in 2023, including the industrial sector. “Manufacturing-related construction remains the best performer among nonresidential construction segments,” said Dr. Basu. “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.”
While higher interest rates have significantly diminished homebuying activity, some parts of the residential markets have outperformed others. “The multifamily market has fared much better as prohibitively high mortgage rates cause many would-be buyers to instead rent,” Dr. Basu said. “Each of the previous three months has set a new all-time record for the most multi-family units under construction.”
Inflation appeared to have moderated toward the end of 2022, but data from the first month of 2023 suggests a still red-hot economy. Dr. Basu warns that ongoing economic momentum means the Federal Reserve will likely raise rates higher than previously expected. “All of this points toward more rate hikes, a slower path back to 2% annual inflation, and elevated risk of a recession. The segments most exposed to rate hikes, like housing, have already felt the negative impacts, and higher borrowing costs will eventually catch up with the nonresidential sector.”
Marcum’s national construction leader, Joseph Natarelli, said, “Between interest rate hikes and material cost escalations, I have seen a lot of our construction clients innovating to overcome price pressures – and those innovations can put money back into their businesses. R&D tax credits are one of the most overlooked incentive for small business owners. Any business that has incurred research and development expenses related to developing or improving products, services or processes may be eligible for an R&D tax credit that can apply to expenses including salaries, materials, supplies and even consulting fees.“
About Marcum Construction Services
Marcum LLP is one of the leading construction accounting firms in the U.S., providing audit, consulting, and taxation services to clients ranging from start-ups to multi-billion-dollar enterprises. Among the country’s foremost experts in construction accounting, Marcum’s construction professionals are frequent industry authors and speakers and serve as technical reviewers for the AICPA’s construction audit and taxation guides. Marcum’s construction group also publishes several definitive industry and presents an ongoing series of industry summits and technical webinars focused on the unique needs of construction contractors.
About Marcum LLP
Marcum LLP is a top-ranked national accounting and advisory firm dedicated to helping entrepreneurial, middle-market companies and high net worth individuals achieve their goals. Marcum’s industry-focused practices offer deep insight and specialized services to privately held and publicly registered companies, and nonprofit and social sector organizations. The Firm also provides a full complement of technology, wealth management, and executive search and staffing services. Headquartered in New York City, Marcum has offices in major business markets across the U.S. and select international locations. #AskMarcum.