It’s that time of year to talk about the construction economic happenings of 2022 and the outlook for 2023. If I had to pick a phrase to describe the state of the economy today, it would be “Unpredictability is the new normal.” The economy can change overnight. For example, in just one recent week, the outlook on the energy market has changed three times.
Many factors influence the economy, including energy, inflation, health, the supply chain and the geopolitical environment. This also has a ripple effect. In fact, there are still ripples left over from COVID. It is a bit like the ripples that continue to move across the water’s surface long after someone jumps in.
Here is what we are seeing regarding the global and domestic patterns of 2022 and what we envision for 2023.
The Global Economy
The global economy is on tenterhooks with many dynamics that could impact our markets:
- Central banks are trying to control extremely high inflation with interest rate increases.
- Global labor actions continue to impact supply chain and ocean freight stability.
- Geopolitical uncertainty is also affecting economies:
•Russia’s war in Ukraine continues to impact the global food and petroleum markets.
•China’s desire to “reunify” with Taiwan may “test the mettle” of the entire world.
- Experts think that by May 2023, India will overtake China as the most populated country. Since economies are directly related to population trends, this matters. More people means more demand for goods and services, manufacturing and construction. In fact, the world population is believed to have eclipsed the 8 billion mark in November 2022.
Global economy positives:
- Many think of inflation as a USA problem, but it’s really a global problem. Of the G20, the USA is in the middle. In fact, the inflation rate is higher in Mexico and much of Europe.
- China is beginning to lift some rigid COVID restrictions.
- Analysts feel that China’s threats to Taiwan will be more of a flash point rather than reflecting a high probability of invasion in 2023.
- Experts agree that Russia cannot win its Ukraine invasion, but Russia seems determined to prolong its not-losing and exasperate that decision’s negative effects.
The Domestic Economy
Domestically, we have recovered dramatically from the COVID economic downturn. Here are other key issues:
- The Federal Reserve is making historical rate increases to cool the overheated economy and inflation rate. Rate increases are being felt in the residential market; however, employment, wages, consumer spending and business balance sheets remain resilient.
- The current forecasted target federal funds rate is 5%.
- Economists predict we will have a recession, but it will likely be neither long nor deep. Recessions, which are part of an economy’s ebb and flow, cure inflation by slowing down the economy.
- Labor markets are strong and supply chains are recovering.
- Commodity and construction material prices are still elevated, but lumber, steel, aluminum and crude oil are well off their highs.
- The services sector has seen a rebound in 2022.
- The US dollar (the world’s predominant reserve currency) is strong, which has mixed implications. It makes our imports cheaper but weakens our competitiveness with exports. A strong dollar also depresses profits in international markets for U.S.-based companies.
The Construction Industry
Within the three areas of construction, there is one clear winner. Civil infrastructure comes out on top due to worldwide infrastructure investments. The big construction loser is residential construction due to its privately funded projects that are very sensitive to interest rate increases. In the middle lies non-residential construction.
The non-residential construction pipeline is strong, although bottlenecked.
- Despite the forecasted recession, the more resilient non-residential construction market should remain strong with mild to moderate growth.
- Even though they are coming down, construction material input prices are still about 40% above early 2020 levels.
- There has been a historical demand for design services with 20 months of consecutive growth for the American Institute of Architect’s Architectural Bookings Index.
- Projects entering planning hit a 15-year high (and are within 5% of an all-time high), with strength not just in dollars but in the number of projects. However, we have seen a trend in projects being delayed in planning due to constraints in architectural bandwidth, contractor labor availability, material availability and material prices.
- The Multi-family construction market should remain strong. Single-family construction often leads the overall economy and is forecasted for mild contraction in 2023, followed by a rebound in 2024.
- Manufacturing starts have seen +170% growth over the last year due to a shift toward onshoring (including semiconductors), electric vehicle development and battery manufacturing.
- Infrastructure starts are up 23% due to the Infrastructure Investment and Jobs Act and will continue growing by 5-10% through 2026.
- After adjusting for inflation, medical and education projects have seen mild to moderate growth in starts, which should continue through 2023.
- The office market remains depressed due to remote and hybrid working arrangements; however, the data center market remains very robust.
- The warehouse market is now overbuilt and experiencing project cancellations. 2022 was the peak year for warehouses and will probably hold onto that title for quite some time.
- Hotels will continue to be strong but still well below 2019 pre-pandemic levels.
- Retail is growing due to populations shifting out of urban areas, but it is still nowhere near its peak year of 2017.
As you can see, there are quite a few headwinds. With all that’s happening, you may wonder what is pushing us along:
- Non-residential construction is more resilient than single-family residential and should have mild to moderate growth.
- Material availability and costs are improving.
- The project pipeline is robust with large capital-intensive projects.
- While experiencing its first (mild) decline in November, demand for design services has been extraordinarily high.
- As interest rates rise and material prices cool (although still well above pre-pandemic levels), labor shortages should ease as less resilient industries reduce their workforce.
- Internationally, investment in renewables, electric vehicles, and lithium-ion battery production is exploding almost competitively. Many are looking into more ways to use green industrial hydrogen and we even see renewed interest in nuclear energy. This may not be enough to bail us out in the short term, but it’s good for the long term.
Trends to Watch
- From end to end, the industry is looking to technology, partnerships and processes with growing intensity. After all, our industry remains one of the last to be substantially affected by the technological revolution. Keep an eye on the evolution of Virtual Design and Construction (VDC), Prefabrication, and Design for Manufacturing and Assembly (DfMA) as vehicles to improve our productivity, building lifecycle costs, timelines, safety, working conditions and more!
- Two more trends to watch in the construction market go hand-in-hand. The labor productivity of the construction sector is among the worst and only worsening. This, combined with the lack of skilled labor that dates back to before the pandemic, is creating more issues.
Even with numerous variants pushing and pulling the economy in many directions, 2023 is not looking like a year when the bottom will fall out of the market. In fact, for many construction market segments, it should be quite prosperous. May any recession be short and superficial and just enough to set the economy straight. And may we all learn to get comfortable with the motto, “The only thing constant is change.” Happy New Year, everyone!
Curt Fessler is the Market Research Manager at Construction Specialties, in charge of economic and construction industry analysis and forecasting. He gathers market insights, analyses material and product pricing, studies trends and conducts competitive analysis. In addition to these superpowers, Curt has an MBA. He is a Lean Six Sigma Green Belt and a CSI CDT. And he also holds a degree from McDonald’s Hamburger University in Chicago. Curt has been with CS for 15 years in several product delivery and marketing leadership roles.