Value of Construction Starts Expected to Flatten in 2023
Washington, DC, April 14, 2023-The value of construction starts will flatten in 2023, said chief economist Richard Branch, in his keynote speech at the Dodge annual Outlook 2023 event.
Reflecting on Q1, the data shows that the overall starts forecast has little changed.
“We are on track with our initial 2023 forecast from last year,” says Branch. “We predicted that starts value would remain flat; however, that’s too simple to end on. Considering inflation and allocated project funds, we’re still on the razor’s edge of a recession, even if we don’t see a strong decline in the numbers. That’s not to say every sector of the industry will struggle; manufacturing continues to show positive growth, supported by the passage of the CHIPS and Science Act last year.”
Economic Outlook First Quarter
At the close of the first quarter, we find the U.S. economy at a crossroads. The labor market is showing that jobs are being created, labor participation is flat, and the trades are one of the biggest areas with job openings. However, core inflation has not slowed enough, despite numerous interest rate increases from the Federal Reserve. As a result, the Fed is going to keep raising rates until there is a feeling that inflation is under control. Every additional rate increase raises the odds of a recession.
An Abrupt Event: The Banks
Overall, the U.S. banking system is healthy, but smaller regional banks could face difficulty, and many have begun to tighten lending standards. These smaller banks are the lifeblood of the construction sector – providing credit not just to contractors, but also loans to developers for many types of projects. Should credit continue to tighten, it could put many small players in the construction sector in difficult situations and potentially lead to a sharper pullback in construction starts.
As of Q4 2022, total announced funding associated with the IIJA had reached US$186.3 billion, to be distributed across more than 6,900 projects, continuing to boost construction. As we start 2023 and start thinking about 2024, these will likely be the biggest growth years for infrastructure dollars whether it’s for street, bridge, water or sewer. This raises the question of whether the construction industry is equipped to handle these ongoing and still forthcoming nonbuilding projects.
With public funding from the CHIPS, IRA, and IIJA legislations flooding into the construction sector, leading to larger and larger construction projects, but potentially creating a bifurcated market. Areas of the country where large manufacturing and infrastructure projects are happening should be solid in 2023. However, those areas that rely on small and medium building projects could feel enhanced pain as the year progresses.
Worker Shortage Threatens, But Does Not Halt, Projects
The projected influx of infrastructure work is dependent upon a construction workforce that faces a considerable labor shortage. Many industries like construction may keep hiring and resist cutting jobs, even if demand slips and the economy worsens.
Research from Dodge’s 2023 Issue One, Civil Quarterly found that civil contractors are concerned about where they'll find sufficient numbers of skilled, properly trained talent at all levels.
The research report shows a considerable number of contractors are expecting an increase in revenue, with more than half of those (62%) attributing this to expecting more work. At the same time, a majority of contractors report a high need for skilled laborers; 72% are experiencing extreme difficulty sourcing the right workers. These contractors are also expecting to experience further attrition due to this lack of staff.