Home Finance The US Construction Outlook: Retreat or Rotation?

The US Construction Outlook: Retreat or Rotation?

by internationalbanker

By Kenneth D. Simonson, Chief Economist, Associated General Contractors of America





The construction industry in the United States appears to be at a turning point. What remains to be seen is whether the turn leads downward or in a series of diverse directions.

The clearest sign of a downturn comes from the single-family housing market. Most indicators—new and existing home sales, starts, building permits, spending on houses under construction and builder sentiment, among others—have been negative for many months and appear to augur further contractions for at least the next several months.

Yet there are some indications that the worst may be over or, at least, close at hand. Soaring house prices and fast-rising mortgage interest rates made home ownership unaffordable for many would-be buyers and unattractive for existing homeowners holding mortgages with ultra-low rates. But by early February, the average rate for the typical 30-year mortgage had cooled to 6.1 percent from 7.1 percent in November. House prices had begun to decline in many parts of the country. The Producer Price Index (PPI) for materials and services used in single-family construction topped out in March 2022 and slumped by 7 percent by December, potentially bringing new-home sale prices back within reach for more buyers.

The story may be reversed for multifamily construction, however. U.S. Census Bureau figures on construction spending in December 2022 show that outlays on multifamily projects climbed by 3 percent, seasonally adjusted, from November and by 21 percent from December 2021. (Census spending numbers are in current dollars—not adjusted for inflation.) In contrast, single-family construction spending slipped by 2 percent for the month and by 15 percent from a year earlier. The number of multifamily units (individual flats or condominiums) under construction reached the highest level in nearly 50 years. But the number of units started in December was 25 percent below the total in April 2022, the peak month. In addition, rents are reportedly falling in numerous metropolitan areas.

In short, there is reason to expect that enough households will be in the market for either first homes or relocation for single-family construction to pick up later this year. Meanwhile, multifamily construction is at risk of shrinking once current projects are completed. The continuing increases in the Federal Open Market Committee’s (FOMC’s) short-term interest rate target are pushing up the costs of financing new developments, but developers may no longer find tenants willing to tolerate the higher rents needed to cover those costs.

Higher financing costs, coupled with flattening or decreasing rents, are similarly dimming the prospects for income-dependent nonresidential projects, such as retail, warehouse, office and hotel construction. However, any slowing in these segments will likely be outweighed by ongoing growth or pickups in four other major categories: manufacturing, renewable energy, infrastructure and data centers.

Manufacturing-construction spending reached all-time highs in current dollars through much of last year and ended the year with a 43-percent gain over the December 2022 rate. There were particularly large increases in the category that the Census Bureau calls computer/electronic/electrical manufacturing. Spending in that segment nearly tripled, driven by the construction of semiconductor fabrication plants (known as “fabs”) budgeted at $10 billion apiece in Arizona, Texas and Ohio. These plants and others in this category are expected to add to spending totals throughout 2023, thanks in part to funding provided by the CHIPS and Science Act, which became law last August.

Spending on the second-largest manufacturing category in the Census Bureau’s taxonomy—chemical and pharmaceutical plants—declined by more than one-quarter in 2022. However, investment in new natural-gas liquefaction facilities (called “trains”) in Texas and Louisiana may boost this segment after permitting, design and procurement hurdles are overcome.

The largest gains in manufacturing construction are likely to come from a plethora of plants announced and, in some cases, started in 2022 to build electric vehicles (EVs) and their batteries and other components. These plants cost several billion dollars each and are planned or underway in numerous southern and midwestern states. In addition, there are likely to be a host of manufacturing plants constructed, renovated or expanded over the next several years to support reshoring (relocation of production from overseas to the US), renewable energy, and carbon capture and sequestration (CCS).

Renewable-energy construction ranges from offshore wind turbines off the Atlantic coast to onshore wind and solar fields in a variety of states to thousands of EV-charging stations across the entire country. Investments in transmission and pipelines, as well as CCS and utility-scale electricity-storage facilities, are also likely at some point, but the design, timing and magnitude are as yet uncertain.

Many of these projects may be eligible for generous federal tax credits enacted under the Inflation Reduction Act (IRA) that President Joe Biden signed in August. However, the law includes several new definitions and requirements that have yet to be finalized by the Internal Revenue Service (IRS) and other relevant agencies. Until that happens, much of the anticipated investment may be stalled.

Uncertainty also surrounds much of the expected investment in infrastructure—specifically, projects funded in part by the Infrastructure Investment and Jobs Act (IIJA). That law was signed in November 2021, and the White House announced on its first anniversary that $185 billion of funds had been “released”. However, little money has actually been spent to date on the projects underway. In a survey conducted by the Associated General Contractors of America (AGC) and Sage in November and December, only 5 percent of the nearly 1,000 responding contractors reported working on new projects funded by the law. Another 6 percent stated that they had won bids but had not started work, while 5 percent had bid on projects but had not won any awards yet.

As with the IRA, IIJA money comes with many new or tightened strings attached. State and local agencies, along with contractors, have been awaiting clarification on many of these points.

Even without IIJA funding, however, there has been strong growth in several types of infrastructure construction. The Census Bureau reported that spending on highway, street and bridge projects increased by 14 percent, not adjusted for inflation, between December 2021 and last December. Outlays for transportation facilities—comprising air, land, underground and water structures for passengers and freight—rose by 9 percent. Spending on sewage and solid-waste disposal construction jumped by 26 percent; water-supply systems climbed by 28 percent; and conservation and development—mainly rivers and harbors—increased by 23 percent.

Funds for these projects come from a variety of sources, including direct federal appropriations; pass-throughs to state and local agencies; state and local general funds, designated or “earmarked” taxes and bonds; outlays by freight railroads, trucking companies and ocean-shipping lines; and user fees such as highway tolls and water and sewer charges.

Unlike the new legislation that is giving a lift to manufacturing, renewable-energy and infrastructure construction, data-center projects have grown in number and size for several years. Unfortunately, Census figures do not break out data centers—they are included in the office category—so measuring their growth with the same yardstick is impossible. But frequent press announcements suggest that data-center construction will continue to be hot in many parts of the country. For instance, Amazon announced in late January that it intends to spend $35 billion over several years in Virginia—outside of the “Silicon Alley” region of northern Virginia regarded as the “world capital” of data centers.

Finding the workers to execute more projects is likely to be contractors’ biggest challenge in 2023. In nearly every month of 2022, there were more job openings at month’s end than ever before for that month. Through most of 2022, end-of-month openings for the first time exceeded the number of workers hired during the entire month, implying that contractors wanted to hire more than twice as many employees as they could bring on board. In the AGC/Sage survey, two-thirds of the respondents reported that they expected to add workers in 2023, but 58 percent said filling positions would be as hard as or harder than in 2022.

The supply chain will also remain problematic for some items, although there has been widespread improvement compared to the previous three years. Lead times for electrical equipment, especially switchgear and transformers, reached unheard-of levels throughout 2022. And “tight supplies” of cement in nearly every state, as the Portland Cement Association (PCA) described the situation in October, left many contractors with limited allocations of ready-mix concrete, leading to sometimes lengthy delays in executing projects.

Thus, the year ahead is likely to be challenging on many counts. On balance, demand for construction appears headed upward, thanks to massive investments on the way, related to manufacturing, renewable energy, infrastructure and data centers. But contractors will have to contend with a host of uncertainties regarding new regulations, labor availability and selected supply-chain bottlenecks. Meanwhile, homebuilders and contractors constructing income-producing properties face shrinking market prospects. In short, a significant rotation among construction categories appears to be in the cards but not an overall retreat.



Kenneth D. Simonson has been the Chief Economist of the Associated General Contractors of America, the leading trade association for the construction industry in the United States, since 2001. Fellow and past President of the National Association for Business Economics (NABE), Simonson holds an M.A. in Economics from Northwestern University.


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