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The Economic Environment in 2023
Any construction market forecast is based on the current macroeconomic conditions for the economy as indicated by measures such as interest rates, inflation, unemployment, spending, and so on. While the entire economy operates in the same economic environment, different industries and industry sectors may fare better or worse than others. So, forecasts for specific construction markets require analysis of current events, trends, and the likely impact of anticipated future economic conditions on each market.
Coming into 2023, the biggest concern for the U.S. economy was the possibility of recession—which occurs when there is a simultaneous decline in gross domestic product (GDP), employment, and investment. The fear was–and still is to some extent–that the interest rate increases made by the Federal Reserve Bank to curb inflation, which is the sign of an overheated economy, would put the brakes on spending to the point of recession.
However, as of this writing, the Associated Builders & Contractors, Associated General Contractors, and Dodge Data and Analytics are of the opinion that a recession is unlikely in 2023. Their optimism is based on the recent decline in inflation, continued job growth, and increased government spending, for example, on IIJA infrastructure projects. Surveys of working contractors indicate that more than twice as many expect their sales to increase than believe their sales revenues will decrease in 2023. Some sectors, though, will do better than others, and there are regional differences as well. Contractors who are able to target the sectors expected to grow in 2023 should consider doing so.
Construction Markets Expected to Grow in 2023
It should come as no surprise that the $1.2 trillion in government funding authorized by the Infrastructure Investment and Jobs Act signed into law in November 2021 will increase public works construction in 2023. In fact, spending on public works projects in 2023 is estimated to reach $225 billion, an increase of 18% over 2022.
In 2023, there also should be significant growth (8%) in construction related to utilities due to the continued move toward renewable and alternative energy sources. And the number of people now working remotely and the continued growth of online shopping should result in an uptick in the construction of data centers, which are part of the office construction market.
Construction Markets Expected to Stall or Decline in 2023
Although the demand for data centers is expected to increase, the rest of the office construction market is expected to decline. So is warehouse construction, which was, until recently, a strong component of the commercial construction market. That’s due largely to Amazon dropping or delaying its plans to build millions of square feet of new warehouse facilities as consumers have started spending less under the impact of higher interest rates that eat into household budgets. Retail construction has declined drastically as online shopping drains customers from brick-and-mortar retailers.
Manufacturing construction grew substantially in 2022 as many companies re-shored their offshore manufacturing operations to combat supply chain disruptions and very high shipping costs. But demand for manufacturing construction is now expected to drop sharply in 2023.
Residential construction is severely challenged by recent interest rate increases. Building permits and housing starts have been declining for months after what appeared to be a promising start to 2022. Experts anticipate residential construction demand bottoming out in Q2 2023.
Forecasts Aren’t Perfect
There are a few factors that could change the picture for the construction markets as 2023 progresses. For example, construction equipment manufacturers are having trouble keeping up production because of ongoing supply chain issues. Higher interest rates may result in projects being postponed or canceled. And labor shortages continue to make it difficult for contractors to hire skilled workers.
Contractor Bonding Capacity
Regardless of the construction market forecast at any point in time, contractors need to build and maintain their bonding capacity to take advantage of the opportunities that arise for them. A contractor’s eligibility for government-funded projects and many larger privately financed projects depends on furnishing the necessary construction surety bonds—most commonly, bid bonds, performance bonds, and payment bonds. It only makes good business sense for contractors to document their past project successes, employ recognized best operating practices, and work to improve their personal and business finances. All of these actions are essential to building bonding capacity.
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