Issue 48 – Second Quarter 2024
The construction industry held up remarkably well through the second quarter of 2024, yet cracks are beginning to surface under the weight of high interest rates and ongoing labor shortages. Much of the industry’s momentum is concentrated in federally funded or federally incentivized segments like infrastructure and manufacturing, and other primarily privately financed segments have struggled in recent months.
Economywide inflation has waned in recent months, and there are recent indications that the labor market is weakening. While this emerging economic weakness is a cause for concern, it’s also a sign that the Federal Reserve will begin cutting rates at their September meeting. Lower borrowing costs and looser lending standards will represent a welcome tailwind for the industry.
The Good
Manufacturing Construction
Manufacturing-related construction spending continues to surge as the CHIPS Act, the Inflation Reduction Act, and a broad-based movement to reshore capacity fuels megaprojects across the country. While much of the increase is due to massive semiconductor manufacturing plants, there is plentiful momentum in other subsegments including the electric vehicle supply chain, metal plants, and food and beverage manufacturing facilities.
The Strictly Okay
Healthcare Construction
Construction spending in the healthcare segment has fallen in three consecutive months, as of June 2024, and is about 5% below the all-time high established in March. Despite the recent decline, spending in the segment is still up about 46% over the past year and should remain a growth segment due to the demographically driven need for more outpatient facilities.
The Bad
Residential Construction
Residential construction spending is up just 7% over the past year and has fallen sharply over the past few months. This recent softness is due to a few factors. Multifamily construction activity has slumped after surging to record highs over the past few years, weighed down by slumping rents in certain markets and high borrowing costs.
The Ugly
Emerging Economic Weakness
The July 2024 BLS employment report, which showed the unemployment rate rising to 4.3%, up 0.8 percentage points from one year prior, was so disappointing that many forecasters have increased their odds of recession occurring by the end of this year. It is unclear if that report was a statistical aberration or a true reflection of labor market weakness—Hurricane Beryl may have inflated unemployment while suppressing hiring. If unemployment is in fact rising while hiring is slowing, however, the Federal Reserve may struggle to navigate a soft landing. In either case, it now appears likely that rate cuts are coming in September. The question now is whether rates are reduced by 25 or 50 basis points.
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