Basu: Economic uncertainty to continue into 2023

While rising interest rates are driving single-family construction into a recession, multifamily is thriving due to houses becoming more expensive. Photo: william87/iStock / Getty Images Plus /Getty Images

Anirban Basu, chief economist at the Associated Builders & Contractors (ABC), does not believe the U.S. is currently in a recession.

Basu, however, says there is a chance a recession eventually surfaces.

“Typically, when I think of recession, I think of too much supply chasing too little demand,” he says. “You don’t have enough buyers for what’s out there in inventory or being produced. We have the opposite situation now. We have too little supply given all that demand. We have 3.5 percent unemployment, and the nation added 520,000 jobs in July. None of that is consistent with recession.”

Basu believes the U.S. has reached peak inflation, though. At the same time, the world economy is trending toward a recession.

“Absent some black swan event, [if] the [U.S.] economy is allowed to play out along its current trajectory, I think we have probably achieved peak inflation,” he says. “In July, the World Economic Outlook was released by the International Monetary Fund. The title of that outlook was ‘Gloomy and More Uncertain.’

“The British government has told its people to expect a protracted recession [and] that real income is expected to fall 4 percent next year,” Basu adds. “We see weaknesses in China, of course, with these serial lockdowns. Obviously, what’s happening in Eastern Europe has impacted the entire continent. There has been a slowdown in economic activity in Brazil. You put it all together, [and] almost anywhere you look the economy is decelerating.”

Because of these developments, Basu expects demand for commodities such as steel and oil to continue softening. He points out that oil prices recently dropped from $122 a barrel to $90 a barrel, and he expects those sorts of dynamics to continue.

Still, a question remains: How soon will inflation subside?

“Don’t expect inflation to decline rapidly going forward,” Basu says. “We’ve actually done the easy part, believe it or not. How do you get inflation down when you’ve got 3.5 percent unemployment, 1.8 job openings for every unemployed American, wages rising so rapidly [and] apartment rents rising so rapidly because we don’t have enough housing in this country? Some of this inflation that’s left is going to be quite stubborn, quite sticky. We may have achieved peak inflation, but that’s a small victory because inflation will remain stubbornly high for the foreseeable future.”

Materials pricing

Through the first eight months of the year, construction materials prices have moderately decreased. These decreases are another sign inflation has peaked, Basu says.

“Earlier this year, when you looked at construction materials prices, they were up more than 20 percent on a year-over-year basis,” he says. “The most recent reading on that was 17.4 percent. Inflation is still very high – don’t get me wrong – but it’s not as high as it was on a year-ago basis.”

An across-the-board decrease in prices isn’t happening, though. Prices for materials such as concrete continue to be stubbornly high, and natural gas prices have risen of late, too.

Contractors, by and large, have still been able to successfully pass increased costs onto customers. But passing them on could soon become harder to do.

“I think what many contractors might find during the year ahead is that they are going to have more difficulty passing along those cost increases,” Basu says. “There’s pervasive pessimism out there among project owners and they’re going to be more price sensitive or cost sensitive going forward, I suspect. That’s one of the reasons contractors expect their profit margins to shrink over the next six months.”

Basu

Looking ahead

During an ABC midyear outlook event, Basu mentioned the rest of 2022 should be a period of growth while 2023 poses a number of risks.

One prevailing risk for next year is how the Federal Reserve responds to sticky inflation. This year, the Fed raised interest rates 0.25 percent in March, 0.5 percent in May and 0.75 percent in June and July.

“All of a sudden, this starts to add up,” Basu says. “Now you’re talking about an increase in short-term rates of 2.25 percent. That’s not inconsequential. More interest rate increases are coming as the Federal Reserve continues to fight inflation. Put that all together [and] I think the accretive effect of that will be deeply negative in 2023. We are, despite current economic momentum, headed into recession. I don’t think it’s going to be a very severe recession, but I think that’s part of our 2023 future.”

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