The risk of a macroeconomic recession in the US and the impact on their business is among the top concerns for construction executives. Among the two primary categories of construction (residential and nonresidential), activity has begun to decelerate in recent months, but it generally continues along a growth trend.
Residential Construction
Residential construction was higher by 15.4% year-over-year but decelerated slightly between May and June, slipping by 1.6% month-over-month. Higher interest rates coupled with skyrocketing home prices have slowed new sales of single-family homes. Housing inventories have surged to 9 months of inventory on hand (6 months is considered well balanced), leading to single-family home starts that plunged 8.1% month-over-month in June. They were down 15.7% year-over-year.
Home builder sentiment also followed this trend with the National Association of Home Builders Sentiment Index hitting its lowest levels since the height of the national lockdown in 2020. But at 55 points in July, the index was still higher than the average readings of less than 20 points for 40 months during the Great Recession.
Multi-family housing units are a different story. Starts in multi-family housing units surged by 15% month-over-month in June and were 16.4% higher year-over-year. Aside from a one-month surge just prior to the pandemic, one must go back to the mid-1980’s to find a period in which the total number of units being started was higher.
Many home buyers have been shut out of the single-family housing market because of higher interest rates and home prices. Affordability will improve over time as home prices fall, but at this time this trend is pushing many potential home buyers into apartments and other types of multi-family rentals.
Nonresidential Construction
Nonresidential construction activity is facing similar differences. Manufacturing construction is the fastest growing sector on a year-over-year percent change basis, rising by 20.3% over the past year to an estimated $93 billion in annualized spending. Water supply, commercial, health care, amusement and recreation, and waste disposal construction spending were also higher on a year-over-year basis and are expected to continue this trend.
But other nonresidential sectors are already showing recession pressure. Lodging, office, education, communication, and transportation construction spending were among those sectors contracting on a year-over-year basis. Interestingly, given how much focus is being placed on increasing the amount of electric power production in the US, it is surprising that power system construction is the sector falling at the fastest rate. It was lower by 12.5% year-over-year. Shortages of many materials used in power system construction are rampant, prices are high, and that could be slowing construction activity.
The $550 billion in incremental spending that was authorized under the Infrastructure Bill was supposed to be front loaded in the first 5 years and would add billions of additional spending. The problem is that many states (which would have used matching funds to double the size of allocations under the bill) are waiting until prices come down for key materials. This has stalled spending.
The bottom line is that there are still pockets of significant opportunity within the construction sector. A broad macroeconomic recession will not hit all sectors and any reduction in commodity prices could spur new projects (those that are already beyond the design stage) to actually get started. Construction executives should be able to remain opportunistic through this period. Our construction experts are here to help with your financial and operational needs.