Issue 45 – Third Quarter 2023
The construction industry, much like the broader economy, carried a surprising amount of momentum through the end of the third quarter. Construction spending is outpacing inflation on an annual basis. Material price escalation has moderated. Contractors continue to hire. Even residential construction remains in decent shape despite the paralyzing effects of high interest rates on home buying.
There are, however, several headwinds facing the construction industry. Elevated borrowing costs and tight credit conditions have severely diminished demand for certain types of construction, and worker shortages, long an issue for contractors, are driving up the cost of labor, exacerbating the effects of material price escalation that occurred in 2021 and 2022.
The Good
Manufacturing Construction
Bolstered by the Inflation Reduction Act, the CHIPS Act, and the private-sector desire to reshore capacity, manufacturing-related construction continued to outperform during the third quarter. Spending in the category is up more than 60% over the past year and, despite the pace of increase moderating since May, is still up more than 150% since the start of the pandemic. This is almost entirely due to surging activity in microprocessor factories; spending in that subsegment has increased over 1,800% from the low point in 2017 to 2022 (the most recent period for which subsegment data is available). With such a large number of megaprojects currently underway, spending in the category should remain elevated through the end of 2023 and into 2024.
The Strictly Okay
Oil and Gas-Related Construction
Construction spending in the power category, which encompasses oil, gas, and electric, surged more than 5% during the third quarter of 2023. While publicly financed activity accounts for just 14% of the segment, construction spending on government financed power projects is up nearly 70% over the past year, well above the 10% year-over-year increase in private sector activity.
The Bad
Construction Employment & Labor Supply
The construction industry added jobs for the seventh straight month in October, and much of the hiring over the past year has been concentrated in the nonresidential building category, which saw a 6% increase in employment between October 2022 and October 2023. That rapid increase is largely due to megaprojects in the manufacturing category.
The Ugly
Consumer Debt
Despite rapid interest rate increases and a multi-year bout of severe inflation, the demand side of the economy had held up better than anyone anticipated. There are early indications, however, that consumer health is starting to wane. While retail spending remains strong through the third quarter of 2023, credit card debt is now flowing into delinquent status at an alarming rate.
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