Construction Executive presented its "2023 Construction Economic Update and Forecast" webinar with Associated Builders and Contractors Chief Economist Anirban Basu on Dec. 14, sponsored by Aerotek, Bluebeam, CMiC and Raken.

Basu started by announcing the Federal Reserve’s rate increase of 0.5%, the latest in a series of increases aimed at combating inflation. Calling 2022 a “year of tumult and a year of surprise,” Basu further noted that the Russian invasion of Ukraine surprised many, further disrupting global supply chains and causing a shockwave to ripple through global energy prices.

Citing the U.S. Consumer Price Index, with 7.1% year-over-year inflation in November, Basu believes we’ve “peaked in terms of inflation for this cycle”; while inflation hit higher-than-expected levels throughout 2022, it leveled off at lower-than-expected rates by the end of the year. Basu predicted inflation will continue to be problematic through 2023 as it has shifted from transitory inflation due to supply-chain disruptions in 2020 and 2022 to broader inflation due to the labor market, noting that the worst of the supply-chain issues seem to be over, reaching a high point in late 2021.

Blaming the injection of fiscal stimulus coming from the federal government, monetary stimulus from the Federal Reserve and the fact that inflation has now become ingrained in the economy and in people’s expectations, leading to wage and price increases, Basu calls the economy “overheated.”

Basu also suggests that U.S. contractors that work on public works have a great outlook for the next five years, due to the amount of infrastructure funding appropriated by Congress.

Looking at employment metrics from the Bureau of Labor Statistics, Basu noted that U.S. labor force participation, U.S. job openings and construction job openings have all fallen in recent months, suggesting that the drop in construction jobs openings may be due to the residential construction market softening. He added that construction is still up 126,000 jobs over pre-pandemic levels, but for an industry so large, “it’s almost nothing.”

Basu next reviewed the Construction Materials Producer Price Index, which showed a 11.9% year-over-year increase in materials prices, with concrete products experiencing the largest increase at 14.3%, while natural gas and steel-mill products saw decreases of 26% and 26.6% respectively.

Showing a slide for total nonresidential construction spending in both real dollars and 2015 dollars (adjusted for inflation), Basu said that spending in real dollars has increased past pre-pandemic levels, while between February 2020 and October 2022, spending is down 11.8% in terms of inflation-adjusted nonresidential construction spending. When you combine this with the fact that most contractors are at or near capacity, Basu continued, it tells him that the capacity for construction services has shrunk due to the shortage of skilled workers.

Looking forward to 2023, Basu continued to forecast increasing interest rates, albeit at a slower rate, a supply chain that improves but still struggles to regain its balance and another year of higher-than-average inflation. Basu predicted a minor and relatively short recession in 2023 that may not last the majority of the year, saying we could still see GDP growth, just at a slower rate even with a recession. He warned that the end of China’s “zero covid” policy could present a risk for products made in China.

In a Q&A session after his presentation, Basu tackled questions on the next housing boom and the generational differences troubling the housing market, expiring tax breaks, cryptocurrencies and 2022’s CHIPS and Science Act, which whose $280 billion in new funding should help begin supplying the U.S. with cutting-edge microchips in 2024 as mega factories start to come online.

He was peppered with questions about what contractors can do to prepare for a recession and how to manage cash flow. He suggested that contractors will need to aggressively manage cash flow, be more cautious with their skilled workforces and try to find savings in other places rather than trimming jobs. Basu also warned that most contractors that closed up shop around the 2008 recession didn’t disappear in the downswing but rather in the post-recession expansion and warned contractors to expand cautiously in the recovery.

Read Anirban Basu’s CE article “Job Sight: The 2023 Construction Economic Forecast.”

The full recording and slides from this presentation can be accessed here.

The webinar included live polls from the audience, with questions on profit margins, the status backlogs and the leading challenges firms face. The result from these polls are below, compared with polls from previous forecast webinars.