Anirban Basu

Commercial Construction Spending Dips First Time in Nearly a Year

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By KERRY SMITH, EDITOR, ST. LOUIS CONSTRUCTION NEWS AND REVIEW MAGAZINE

According to the Associated Builders and Contractors, national nonresidential construction spending shrunk for the first time in 11 months. The slight decrease comes on the heels of an 11-month record of commercial and industrial construction spending increases, propelled by robust manufacturing construction.

ABC Chief Economist Anirban Basu says although overall nonresidential construction spending is up more than 17 percent since August 2022, manufacturing-specific construction activity accounted for most of that increase.

“Excluding the manufacturing segment, nonresidential construction spending is barely outpacing inflation, up just 6 percent over the past year,” Basu said.

Spending in the manufacturing sector, according to Construction Dive, edged up 1 percent in May and remains up 76 percent year over year. Meanwhile data center construction – a subset of office construction – also inched up 1 percent in May and remains up 6.7 percent year over year.

Yet despite these increases in private-sector, nonresidential construction spending, most other categories are lagging behind, says Ken Simonson, Associated General Contractors of America chief economist.

“Our analysis of federal industry data indicates that public construction spending posted mixed results, as the largest infrastructure categories declined for the month and education spending flattened,” said Simonson. “Highway and street construction dipped 0.4 percent from April and public spending on transportation facilities – such as airports, transit and passenger rail – decreased 0.8 percent.”

Commercial construction spending including warehouse and retail builds also dipped 1.8 percent in May.

“The data for May show there has been no letup in the feverish pace of manufacturing construction but a very mixed picture for other project types,” Simonson said.

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56% of Contractors Nationwide Say Worker Shortage Trumps Supply Chain Woes

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By KERRY SMITH, EDITOR, ST. LOUIS CONSTRUCTION NEWS AND REVIEW MAGAZINE

At Construction Executive’s Dec. 14 economic update and 2023 forecasting session, Associated Builders and Contractors Chief Economist Anirban Basu said the U.S. economy’s “overheated” condition is likely to continue manifesting a prolonged and profound worker shortage in construction, and is also making it tough for estimators to accurately price future builds.

By “overheated,” Basu is referring to a fast-growing economy that is reaching the limits of its capacity to meet existing demand.

The Federal Reserve’s action and inaction, unchecked inflation during 2021 and 2022 and relative scarcity/supply chain delays of construction materials are additional factors contributing to contractors’ challenges during 2023 and beyond, he said.

During the national ABC forecasting webinar earlier this month, contractors were polled as to the greatest challenge impacting their firms at the close of 2022. A total of 56 percent identified skills/worker shortage as the number-one impediment, followed by 28 percent who ranked supply chain and/or materials issues as their biggest hurdle.

“Oil and natural gas prices have soared during 2022, inflation has increased substantially and supply chains remain unpredictable,” said Basu. “And yet, contractors’ leading challenge – even more than it was a year ago – is finding enough workers to get the job done. I find that remarkable. As an economist, I would’ve expected to see some impact on the demand for construction services, but it’s still not that way. It still speaks to a market that is more characterized by demand than by capacity to meet that demand.”

Year 2022 has also been defined by a series of profound interest rate increases, Basu said, adding that the Federal Reserve did not raise rates at all during 2021, leaving inflation to broaden as a result of numerous economic events and pressures. “We are seeing the worst of inflation behind us,” he said, “but inflation will continue to remain problematic in 2023.”

Russian’s invasion of Ukraine in February 2022, he noted, sparked the global market’s response of soaring prices in energy and other construction inputs. While the U.S. inflation rate is more tempered now at year’s end than it was in June 2022, Basu said inflationary pressures have been transmitted from one period to the next, creating somewhat of a self-fulfilling prophesy for the construction industry as contractors and others build inflationary expectations of what transpired in 2022 into their project cost estimates for 2023 and beyond.

“Public-sector construction has a good outlook for the next five years at least,” he said. “But privately financed construction will likely continue to face capacity issues in terms of human capital.”

A leading upstream indicator going forward into 2023 and 2024, according to Basu, will be the volume of work that flows to design firms next year. “Contractors are saying they still have healthy backlogs of work through 2023,” said Basu. “But if we see upstream design firm activity dry up, then we’ll anticipate that 2024 isn’t going to be as strong for contractors.”

Demand throughout 2023 for construction of data centers, fulfillment centers and healthcare builds is expected to remain robust, according to Basu.

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