Construction Economic Outlook: Key Trends for the Next 12 Months.
In a dynamic economic landscape, the construction industry is at the nexus of both challenges and opportunities. For construction company owners who have weathered the fluctuations of recent years, the forthcoming 12 months present a tableau of variables to consider. Let’s unpack the critical trends that are poised to shape the sector in the immediate future.
Construction material costs have seen a downturn in recent months. The Producer Price Index (PPI) for inputs to residential construction, excluding energy (i.e., building materials), noted a decrease of 0.2% two months ago, followed by a dip of 0.1% in the subsequent month. This comes as a breather after the steep hikes in construction material costs that we witnessed in 2021 and 2022.
Relief is on the horizon as supply chain disruptions begin to mitigate. The ripples that shook the construction industry due to supply chain issues over the past two years appear to be settling. The improvement can be attributed to factors such as the reopening of Chinese factories, the decluttering of shipping bottlenecks, and the augmented availability of raw materials.
In response to the soaring prices of yesteryears, some producers are ramping up production. Such moves are expected to alleviate the supply constraints, potentially lowering construction material costs in the months ahead.
Yet, the unpredictability of the market makes it premature to determine the continuity of these trends. If the global economy steadies and the supply chain further stabilizes, we might witness extended declines in construction material costs.
Despite short-term relief, a long-term perspective indicates a likely surge in construction material costs. Factors such as growing population and an uptick in infrastructure projects are anticipated to drive demand. However, the pace at which these costs climb may decelerate in the coming years.
Another pivotal element for the construction industry is the trajectory of interest rates. The Federal Reserve has been on an interest rate hiking spree, with several increments in 2022, and indications point towards a continuation in this trend. Elevated interest rates could taper the fervor of construction activities, considering the heightened borrowing costs.
In sum, the economic forecast for the construction sector in the upcoming year is a mixed bag. On one side, the industry can take solace in declining material costs and subsiding supply chain woes. Conversely, looming interest rates pose concerns. While the certainty of a slowdown in construction by the end of this period remains nebulous, it's an eventuality industry leaders should be attuned to.
Supporting this economic outlook for the construction industry are the following data points:
The US Census Bureau indicated a dip in the construction spending index by 0.2% two months ago.
The National Association of Home Builders (NAHB) revealed its housing market index to be 67 recently, a descent from 70 the previous month.
The Associated General Contractors of America (AGC) trimmed its construction spending projection for the year to a 2.5% growth, a significant cut from an earlier estimate of 3.7% growth.
These indicators hint at a deceleration in the construction industry. However, it's essential to discern whether this slowing momentum is a mere hiccup or a harbinger of an extended trend.
Ascent Wealth Strategies provides strategies for financial/estate and/or tax planning. These strategies do not constitute tax or legal advise. Consult legal or tax professionals for specific information regarding your individual situation.
Clear Creek Financial Management, LLC dba Ascent Wealth Strategies is a Registered Investment Advisor. This case study is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Clear Creek Financial Management, LLC and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Clear Creek Financial Management, LLC unless a service agreement is in place.