What We Learned in December: Construction Industry Momentum Slows
Construction industry momentum faltered somewhat in the final months of 2024. Spending slowed and is roughly flat over the past year after accounting for inflation, while industrywide job growth underwhelmed in December. Despite this slight deterioration, contractor confidence remains elevated in the wake of November’s presidential election, and the industry expects activity to accelerate throughout the first half of 2025.
Backlog Inches Lower, Contractor Confidence Soars
ABC’s Construction Backlog Indicator fell by 0.1 months in December and is down 0.3 months over the past year. This is likely due to the effects of higher interest rates; the decline is entirely attributable to shorter backlogs in the commercial and institutional category. Even so, industrywide confidence remains elevated, with roughly 64% of contractors expecting their sales to rise over the next six months.
Spending Slips
Nonresidential construction spending fell in November and is up just 2.8% over the past year. Private sector nonresidential spending has been particularly weak, rising just 1.7% over the past year. That weakness, due largely to sagging activity in interest-rate sensitive segments, would be significantly worse if not for the boom in manufacturing and data center construction.
Industrywide Job Growth and Labor Market Churn Slow
Construction industry employment increased by just 8,000 jobs in December, with hiring in the residential sector particularly weak. Despite this slowing growth, the industry added jobs at a faster rate than the broader economy in 2024, and that elevated demand for labor led to outsized increases in wages. Average hourly earnings for construction workers increased 0.5 percentage points faster than economywide earnings over the past year.
While industrywide job growth has been sluggish in recent months, the rate of workforce churn—hires, quits, and layoffs—reached historically low levels in November. This suggests that both contractors and their employees may have been in a holding pattern leading up to the election and that hiring may accelerate in the coming months.
Materials Prices Remain Stable
Construction input prices fell in December and are up just 0.9% over the past year. Iron and steel prices have exhibited particularly sharp declines, falling more than 10% over the past year. The fact that materials prices are virtually unchanged since the end of 2022 bodes well for contractor profit margins throughout 2025.
Looking Ahead
While the Federal Reserve has lowered the target range of the Federal Funds rate by a full percentage point since September, borrowing costs remain elevated due to high bond yields and inflation expectations. Many forecasters now expect just two interest rate cuts in 2025. If, however, inflation comes in cooler than expected over the next few months, the path of rate cuts could accelerate, fueling a rebound in construction activity in the latter parts of the year.
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