The Marcum Commercial Construction Index for the third quarter of 2022 reports that the construction industry remains constrained by labor shortages and elevated materials prices, but now also faces a rapidly deteriorating economic outlook and severely elevated borrowing costs. While some construction segments retain momentum, there are signs that broader economic weakness have begun 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. “The number of unfilled construction jobs increased to 422,000 in September, the most in any month since at least 2000, when the Bureau of Labor Statistics began tracking it,” said Dr. Anirban Basu, Marcum’s chief construction economist and author of the report. “Contractors have a level of work under contract that necessitates more hiring, but there simply aren’t enough willing and able workers to fill those positions.”

Material price increases have slowed dramatically in recent months, but elevated input costs remain a major issue for contractors. “Construction input prices have fallen ever-so-slightly back to Earth in recent months but, as of September 2022, remain 40.5 percent above pre-pandemic levels,” Basu said. “To put that meteoric increase into context, construction input prices increased just 12.2 percent over the decade immediately preceding the pandemic.”

The Federal Reserve’s rapid interest rate increases have caused a precipitous increase in borrowing costs, and that’s wreaked havoc on the residential sector, with applications for new mortgages down to the lowest level since 1997. “The monthly payment on a $300,000 home at current rates is the same as the monthly payment on a $475,000 mortgage obtained at the start of the year,” Basu said.

Despite the devastating impact of higher interest rates on home sales, there are currently more new homes under construction than at any point since the Census Bureau began tracking it in 1970. However, Basu warns that may have more to do with longer lead time and market conditions as compared to a year ago. “This is partially a reflection of how supply chain issues are prolonging construction from start to finish, and many of the homes currently under construction were authorized in 2021, when demand for homes was soaring and borrowing costs were historically low,” he said.

While nonresidential construction spending remains below pre-pandemic levels in nominal terms, manufacturing-related construction spending continues to surge. “Supply chain issues related to the pandemic, tariffs implemented over the past half-decade, geopolitical unrest and the resulting increase in energy prices, among other factors, have induced many producers to re-shore manufacturing capacity,” Basu said. “This has led to a massive 46.3 percent increase in manufacturing-related construction spending since the start of the pandemic.”

Ultimately, Basu expects recession in 2023 as elevated inflation, worker shortages and a weakening global economy drag domestic GDP growth into contraction. “The economy appears headed off a cliff, but it is not clear how far it will fall,” Basu said. “Regardless of the breadth and depth of recession, an economic downturn would lead to a decline in construction volume.”