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Construction Outlook: Recession or Resurgence?

recession or resurgence

FRANKHH/SHUTTERSTOCK.COM

BY KEN SIMONSON, CHIEF ECONOMIST, AGC OF AMERICA

Evidence is mounting that the U.S. economy is slowing, perhaps heading into — or even already in — a recession. Will the construction industry be dragged down as well?

As always, the indicators are mixed. Single-family homebuilding is in retreat. Construction segments that depend on rental income to cover the development and financing costs, such as apartment, office, retail, hotel, and some warehouse projects, are highly vulnerable to steeply rising interest rates. Any pullback in demand or inability of tenants to pay further escalation in rents is likely to cause many of these projects to be canceled, deferred or scaled back.

But at least three major categories appear poised for strong and sustained growth: manufacturing, power and infrastructure construction. Already, a large number of huge manufacturing plants have broken ground in a wide range of states, with more projects being announced almost weekly.

The outlook for power construction looks bright. Offshore and onshore wind projects, vast solar fields and new transmission lines to deliver the power to where it is consumed are in the works. To overcome the mismatch between the time these power sources are generated and when the electricity is needed, large-scale battery- and pumped-storage projects are being designed. And tens of thousands of battery-charging stations for electric vehicles will be needed over the next several years.

Funds from the enactment last November of the Infrastructure Investment and Jobs Act have been working their way through various layers of federal and state agencies, program and rule design and bidding. While little money from the legislation has turned into actual spending by contractors to date, that is about to change in a big way. Those funds will continue to flow for five years or longer, boosting highway, power, water, broadband communications, transportation facilities of all types and other categories.

Contractors face multiple challenges, however. The cost of materials and services used in construction rose much faster, until recently, than contractors’ bid prices, putting huge pressure on profit margins. While some materials, such as lumber, steel and copper products, have recently declined in price, prices have continued to rise for other items, including gypsum, glass and concrete products. Shortages and allocations remain troublesome.

Finding enough qualified workers has been an even bigger problem for many firms. For the past several months, job openings in construction nationally have set records and exceeded the number of workers hired during the month. That implies contractors wanted to hire twice as many workers as they were able to find.

Unfortunately, the worker shortage may persist long after materials prices and supplies return to more normal levels. In June, the U.S. unemployment rate for jobseekers with construction experience was 3.7%, an all-time low for June, in a series that dates back to 2000. (Industry unemployment data is not seasonally adjusted, which makes comparisons meaningful only with the same month in prior years, not across months.)

In short, the outlook for construction remains positive overall. But not all types of construction will thrive in the next year. And contractors with projects aplenty will have to price them carefully and work hard to find and keep the employees they’ll need.