Listen to this articleWith workforce woes and construction costs being the lead headaches for contractors, construction backlogs and public investment in infrastructure were still going strong in a recent economic outlook.
That’s just the surface of a surprising economic review and forecast by Anirban Basu, the chief economist of the Associated Builders and Contractors, who spoke Wednesday at a webinar for Construction Executive. Keeping a pulse on the wider economy and trends, he shared some insight on current challenges, future struggles and some things to look forward to.
At the start of the webinar, Basu predicted the Federal Reserve might cut interest rates in September according to the bond market. The consumer price index for all items was up 3.3% over the past 12 months, and May 2024 construction inputs were up 2.1% year-over-year, according to federal statistics.
Basu said he was surprised by the state of the greater economy but added he thought the landing would still be rough, looking at places like credit card debt, job openings and the Fed rate.
Backlog was over 8 months for contractors, according to the latest ABC index. However, even as interest rates start to lower, Basu said his guess is backlog would start to fall in 2026 as demand softens.
Labor shortage and financing still headache for construction
A survey revealed that 60% of responding contractors named the skills gap and worker shortages as their leading challenge, according to ABC and Sage Policy Group, Basu’s firm based in Baltimore. Availability of financing was second place at 17% and insufficient demand was 11%.
There were 8.1 million job openings in the U.S. in May 2024, according to federal statistics. Employers who were looking for construction workers in the field were also competing with franchisees and warehouse services who were hiring at high rates as well. Even with the strength of infrastructure projects, having the number of bodies on the job site was still a question, Basu noted.
Construction inputs were also higher than bid prices, as inputs were 38.8% and bids were 36.2% in May 2024, according to the U.S. Bureau of Labor Statistics.
The economist said the increase of input prices outstripped the growth of bid prices, suggesting it wouldn’t be easy to continue to support the margin. Contractors need to raise their bid prices significantly to keep up with construction costs.
Era of infrastructure ongoing
Nonresidential construction makes up 37% of spending by subsector, according to data from the U.S. Census Bureau. The biggest chunk of spending is manufacturing with 198.1%, followed by sewage and waste disposal at 66.8% and water supply at 65%. Due to government spending with acts such as the Bipartisan Infrastructure Law and CHIPS Act, the public sector was still going strong.
“It’s still the era of infrastructure,” Basu said, noting many of the projects brought on by the CHIPS Act were megaprojects. “There is a lot of public spending, so sewer and water supply, healthcare and highway and street are all high.”
Because a lot of federal money offered to healthcare systems during the pandemic has dried up, he noted he expected some softening in that area.
Architects rating reveals softening in some private projects
However, private construction on projects like multifamily or offices were still softening according to the latest Architecture Billings Index, a lead indicator of projects in the pipeline. In May, the index was at 42.4, which Basu said was the worst in years. The Midwest region was hit hardest with a 41.7 rating.
While the work-from-home model is still popular for both employers and employees, Basu said this trend will continue to soften the need for office buildings. However, demolition contractors might have work ahead of them when banks decide offices are no longer worth maintaining, he added.
According to CoStar, office vacancy in the U.S. was 13.8% in the first quarter of 2024.
One of the bright spots in the commercial construction sector will be data centers, Basu said, as the federal government unbundled the facilities from office construction. Reshoring supply chains, alternative energy and projects like electric vehicle and battery factories will still be muscular as American and foreign company owners focus on North America, he added.