Issue 47 – First Quarter 2024
Heading into 2024, the economy appeared to be in an ideal position for interest rate cuts. Inflation had slowed markedly, from a 9.1% year-over-year pace of price increases in June 2022 to a 3.4% rate in December 2023, employers continued to add jobs at a healthy pace while the unemployment rate remained low, and consumers continued to spend, powering ongoing growth. At the start of January, most forecasters assumed the Fed would cut interest rates at least three times during 2024.
The year’s first quarter has squashed any hopes of imminent interest rate cuts. Inflation has accelerated and now appears to be stickier than anticipated. Most forecasters now expect one rate cut at most in 2024, and not until the end of the year.
The Good
Manufacturing Construction
Manufacturing-related construction, powered by the CHIPS Act, the Inflation Reduction Act, and a broad-based movement to reshore capacity, continues to surge. Construction spending on manufacturing structures is up 184% over the past four years. Given the size of many of these projects and ongoing efforts to strengthen the nation’s semiconductor, clean energy, and electric vehicles production capacity, the manufacturing-related construction segment will retain momentum through the entirety of 2024.
The Strictly Okay
Interest Rates and Inflation
Construction input prices are up just 2.3% over the past year, a rate of increase significantly slower than economywide inflation. Unfortunately, a streak of tame input prices stretching back to early 2023 may be at an end. Prices for inputs to construction increased sharply in April. This is partly due to global supply chain issues, with new bottlenecks arising in the Red Sea, the Panama Canal, and the Port of Baltimore. Global container shipping rates are up 113% since the end of January, according to the Freightos Baltic Index. While that’s still 75% lower than the peak in late 2021, higher shipping costs will eventually put upward pressure on construction input prices.
The Bad
Commercial Construction
Commercial construction spending fell more than 5% during the first quarter of 2024. Warehouse construction, fueled by the expansion of eCommerce, has propped up construction spending in the segment over the past few years and accounted for well over half of all commercial construction spending in 2023.
The Ugly
Nothing
The construction industry has weathered roughly two years of elevated inflation and high interest rates better than anyone could have expected. With inflation accelerating throughout the year’s first quarter, however, it now appears that interest rates are set to stay higher for longer.
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