The Marcum Commercial Construction Index for the first quarter of 2023 reports that the construction industry retains momentum despite still-elevated inflation and ongoing labor shortages. Despite that momentum, the combination of high interest rates and tightening credit conditions, along with a dour economic outlook, means that construction activity could slow in the latter part of 2023.
The index is produced by Marcum’s National Construction Services group.
Manufacturing-related construction continued to outpace the nonresidential segment. “Spending in the segment is up 90.2 percent since the start of the pandemic and accounted for the entire increase in nonresidential spending observed in March,” said Anirban Basu, Marcum’s chief construction economist and author of the report. “Given the scale and anticipated duration of many of these large-scale projects, the segment should retain momentum through the remainder of the year.”
Residential construction volumes faded during the first quarter, though some parts of the segment have fared better than others. “As of March, residential construction spending was down 9.8 percent year over year, and that weakness was entirely confined to the single-family homebuilding segment,” Basu said. “Spending on single-family units fell 0.8 percent in March and is down 22.9 percent year over year, while spending on multifamily units has increased 23 percent over the past year.”
The industry continued to add workers at a faster pace than the broader economy during the first quarter. “Despite economic headwinds, contractors continue to add jobs at a healthy pace,” Basu said. “The industry added 15,000 net new jobs in April, according to the Bureau of Labor Statistics, and employment is up by 205,000 jobs over the past year.”
Labor scarcity, however, continues to push wages, and therefore construction costs, higher. “As a result of labor scarcity, construction wages are rising at a significantly faster pace than economy-wide wages,” Basu said. “In April 2023, average hourly earnings for construction workers were up 5.4 percent, well above the 4.4 percent increase observed for all workers.”
Elevated borrowing costs and tightening credit conditions represent the strongest headwinds for the construction industry. “Conventional wisdom says it takes 12 to 18 months for the economy to feel the effects of higher interest rates, and it’s now been 14 months since the first increase,” Basu said. Certain construction markets, like single-family housing, have already buckled. While contractors participating on private and public megaprojects are positioned to remain busy during the months ahead, those not in a position to participate on those types of projects may experience declining backlogs for much of the next two years.
“The construction industry faces several challenges, including rising costs, a weakening economy and uncertainty about the future,” said Joseph Natarelli, Marcum’s national construction leader. “However, there are also opportunities, such as the need for new infrastructure and the continued growth of the residential market. With optimism and a focus on innovation, the construction industry can overcome these challenges and continue to grow.”
To download the complete Marcum Commercial Construction Index or for more information, visit www.marcumllp.com.