Starts Stay Strong in First Half as Possible Recession Looms

    Adapted from an article published on ENR on July 13, 2022.

    While commodity prices have begun to stabilize following the extreme volatility of the past several years, recession fears continue to mount. Inflation and labor shortages remain ongoing issues within the construction industry as well as the broader U.S. economy.

    “Bid price increases on a year-over-year basis have finally caught up with material cost increases, which will bring smiles of relief to many contractors,” says Alex Carrick, chief economist at ConstructConnect. “Furthermore, expectations of an onrushing recession, due largely to climbing interest rates, are causing pullbacks in some key commodity prices. This is especially apparent in forestry products that go into new homebuilding. But it’s also being seen in some other raw materials, such as copper.”

    Following the drop in materials prices, Carrick expects costs may rise in other areas. “Perhaps the bigger concern will soon shift to compensation and workplace issues, as the shortage of skilled workers is returning more leverage to labor. Tensions in new contract negotiations are almost sure to become more overt.”

    Richard Branch, chief economist of the Dodge Construction Network, says “as 2022 has moved passed the mid-point of the year, the construction sector is at a crossroads. The Dodge Momentum Index, a leading indicator of nonresidential building construction activity, is at a 14-year high as developers and owners start the planning process for hotels, offices, schools and hospitals. This suggests that the nascent recovery in construction starts from the pandemic will continue unabated despite rising costs and labor shortages.”

    This enthusiasm, he says, will be “tempered by rapidly rising interest rates and fears that a recession will put a stop to projects in the planning cycle.” The Dodge forecast predicts that while a recession will be avoided in 2023, there will be a considerable slowdown in construction starts in residential and commercial markets. The market for schools, hospitals, manufacturing and infrastructure should remain stable, Dodge expects.