Plenty of economic pundits are talking about the U.S. economy falling into a recession next year, but not all economists are convinced one is a certainty. While presenting his 2023 construction forecast in a Nov.15 webinar, Richard Branch, chief economist for Dodge Construction Network, said that while he has built out both downside and upside 2023 forecasts, his current forecast for the construction industry does not call for a recession. He believes spending on total U.S. construction starts will register little change on a percent basis and drop fractionally in 2023 to $1,083 billion from $1,068 billion in 2022. “Assuming there is no recession, construction is flat in 2023,” he said.
On the macroeconomic level, Branch’s base case for U.S. GDP growth calls for +0.7% in GDP growth, while his Downside/Recessionary scenario ratchets GDP growth down -2%. His “Upside Forecast” sees +4.1% in GDP growth for next year.
Branch said the number of developers still building projects, the recent easing in prices increases for construction materials, some large hospital and industrial projects in the pipeline and the passage of some large local bond measures for construction could all help stop a recession in the construction market. However, he says pricing pressures are still a major concern. “Pricing will be challenging going into first half of 2023 but will see improvement in the back half,” he said.
The largest of the recently passed major bond measures that will support construction in some local markets include $2.4 billion for technology and stadium improvements by the Austin, TX, Independent School District (ISD); $3.2 billion for facility improvements by the San Diego USD (Unified School District); and $1.7 billion by the Long Beach, CA USD.
While some local metros may have cause to cheer in the institutional, educational and industrial market, Branch said widespread challenges in the residential market will be a drag on construction throughout the industry. That’s an issue for contractors and their suppliers and design professionals because of the impact housing has on other segments of the business.
“I have always viewed construction sector as a train, and residential leads the train as the engine,” he said. Branch added that the housing market will continue to suffer from affordability issues, higher mortgage rates, increases in lot acquisition costs, building materials costs and labor shortages. He believes the trough in spending on single-family housing will occur late in 1Q 2023 or early 2Q 2023, but that the market overall will see a -6% decline in 2023, assuming there is no recession. Multi-family housing will continue to be the stronger segment, he said.
Other project types that should continue to do well in 2023 include research labs, luxury hotels, hospitals, urgent care centers, data centers and factories that can take advantage of the federal stimulus and tax credits for building manufacturing plants in the United States, including those making semiconductor chips, electric vehicles and EV batteries.
Branch isn’t convinced a recession is in the cards for 2023. But he said if it did occur, outside of decreasing demand for residential construction projects even more, it would have a comparatively mild impact on the construction market and could actually help lower project costs by tamping down demand for construction workers and lowering product pricing. His Downside Forecast accounts for a recession that would be milder than ones that hit the market in past construction cycles when measured by percent change in total construction dollars from the peak-to-trough.