Forecasting future construction challenges

Anirban Basu, chief economist at the Associated Builders & Contractors, says there is a chance that inflation has peaked when it comes to construction materials prices and the economy as a whole. Photo: P&Q Staff

U.S. gross domestic product (GDP) declined 0.9 percent in the second quarter amid growing inflationary pressures.

The drop represents the second straight quarter of negative GDP growth, which is a common yet unofficial indicator that the nation is in a recession.

Following a 1.6 percent GDP decrease in the first quarter, the Bureau of Economic Analysis says the second-quarter decrease reflects an upturn in exports and a smaller drop in federal spending.

Anirban Basu, chief economist at the Associated Builders & Contractors (ABC), provided a midyear construction update just a day before the second-quarter GDP was released. Basu looked back at inflation’s impact on construction in the first six months of 2022, and he shared his expectations for what the rest of the year and beyond might look like.

By the numbers

Inflation in June was up 9.1 percent compared to a year earlier according to the U.S. Consumer Price Index. This 40-year high is well above what Basu says is the Federal Reserve’s goal of 2 percent. Core inflation – all items minus food and energy – was up 5.9 percent year over year.

The Producer Price Index for new nonresidential building construction in the U.S., meanwhile, grew 19 percent from June 2021 to June 2022. Basu says the increase illustrates what purchasers of construction services face.

There is a chance, however, that inflation has peaked.

“There is some indication, at least for certain commodities and maybe for the overall economy, that we have achieved peak inflation,” Basu says. “This comes as small solace for people who are in the market purchasing materials right now.”

Construction materials prices are up 20.1 percent over June 2021. This hasn’t slowed the rate at which people are buying construction materials.

“The project owners have still been consuming construction materials in abundance,” Basu says. “Many of you will tell me: ‘I’m operating at capacity, I’m busy, I have a lengthy backlog.’ Will the project owners keep purchasing construction services when the cost of delivering them is so high?”

Basu

Looking ahead

Basu does not expect construction costs to continue on their current upward trajectory.

“I don’t [see construction costs continuing to go up], certainly not at the pace they’ve been increasing,” he says. “I see some deflation in front of us. The global economy is largely headed into a recession. When the world economy slows, that reduces demand for commodities. That should cause input prices to subside.”

Similarly, Basu says supply chain issues are improving and delivery times are expected to go down.

“I think we are seeing some supply chain improvement,” Basu says. “Obviously, we still don’t have enough computer chips, but recently Mercedes and BMW are receiving enough computer chips now that they can operate almost at full capacity. I think these supply chain issues will steadily dissipate and that’s part of the improving inflation story to come.”

Basu believes the remainder of 2022 will be a period of growth. Beyond this year, however, could be a different story as the Fed adjusts interest rates with the hope of combating inflation and avoiding a recession.

“I still don’t think a recession has begun, even though we’ve had two consecutive quarters of negative GDP growth,” he says. “I think 2023 is fraught with risk. I’ve been saying for quite some time that we’re going to get through 2022 but watch out for 2023.”