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Significance of Economic Forecasts in Construction
The construction industry typically looks to Dodge Data & Analytics for economic forecasts to guide planning related to workforce development, equipment purchases, project financing, and other short- to medium-term business decisions. The big question for the construction industry in the first quarter of 2023 is whether the U.S. economy is likely to enter into a recession this year and, if so, how bad are things likely to get. The Construction industry relies on research and forecasts from other sources in addition to Dodge Data & Analytics, such as the National Association of Home Builders, the Equipment Leasing & Finance Foundation, and other industry groups, as well as a variety of private research firms.
Predictions about the likelihood of a recession in the construction industry take into account such factors as:
- Interest rate movements
- Unemployment rates and job creation in various sectors of the economy
- Planned construction, and actual construction starts (residential, commercial, and institutional)
- Price indexes for construction materials
- Vacancy rates and demand for different types of structures, and more
Economic forecasting is a somewhat inexact science. World events, such as Russia’s invasion of Ukraine, production cuts by OPEC, transportation strikes, supply chain disruptions, or (as we’ve seen) global pandemics, can change the economic picture dramatically, often with little warning. And data is subject to interpretation by experts who don’t always agree with each other.
How Is Recession Measured?
All things considered, 2022 was not a disastrous year for construction, despite high inflation, which is, after all, the hallmark of a growing economy. However, the Federal Reserve’s efforts to curb and decrease inflation by increasing interest rates understandably raises concerns about the possibility of a recession in 2023.
Higher interest rates slow the economy’s growth as a whole, which is reflected in Gross Domestic Product, or GDP. A recession is defined as two consecutive quarters of negative GDP. Some recessions, such as the Great Recession of 2008, are deeper and last longer than others.
Why Recession Seems Unlikely in 2023
Inflation has eased a little due to the Fed’s interest rate increases. That alone does not rule out the possibility of a recession in the U.S. economy in 2023. However, there are indications that further rate increases may not be needed after Q1 2023, which reduces the likelihood of recession. And according to Dodge Data, if a recession were to occur, it would not be as severe as other recessionary periods, such as were experienced in 2008 and 2001.
Reasons for optimism that the construction industry will not see a recession in 2023 include (but are not limited to):
- The strength of the U.S. banking system
- An undersupplied housing market
- Slight improvements in the Consumer Price Inflation and Producer Price Index
- The ongoing skilled labor shortage
- The current 15-year high in planned construction projects still moving ahead
- Improvements in pricing indexes for some construction materials
- Expectations that mortgage rates will stabilize in Q2 2023
- Low vacancy rates in the multifamily market
- The anticipated allocation of federal funds from the Infrastructure Improvement and Jobs Act (IIJA) to state and local governments
- An uptick in hotel construction due to post-pandemic travel
- Stronger demand for manufacturing construction as companies bring back overseas operations, such as chip manufacturing, and add facilities for manufacturing electric vehicles and their components
What Does This Mean for Construction Companies?
Construction contractors may not be ready to make substantial investments in hiring new workers or purchasing expensive equipment at this point. However, they need to maintain their ability to jump on opportunities quickly when they arise. That includes maintaining or increasing their bonding capacity. Being able to purchase the necessary construction surety bonds is key to any contractor’s financial health and well-being.
Likely Construction Surety Bond Needs
To be able to participate in major construction projects of any kind, contractors must be able to provide the financial protection that public project owners (and an increasing number of private project owners) require in the form of construction surety bonds. There are a number of different types of construction bonds, the most frequently required ones being:
- Bid bonds, which guarantee that the winning bidder will accept the job and can provide the required performance bond
- Performance Bonds, which ensure the chosen contractor’s completion of the job in accordance with the contract with the project owner
- Payment Bonds, which legally obligate the contractor to pay suppliers, subcontractors, and workers according to contractual terms
- Maintenance Bonds, which guarantee the correction of construction defects for a specified period of time after project completion
All construction bonds require the contractor to pay all valid claims for damages, so that project owners don’t bear the cost of remedying the contractor’s nonperformance.
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