The economy is currently “humming along, and is much stronger than I would have expected at this point," but a recession "will come in the next 12 months," construction sector economist Anirban Basu said on a construction industry-sponsored webinar on July 26. “It’s going to get worse before it gets better.”
High interest rates, raised again by the Federal Reserve on July 26, and in particular skilled labor shortages, continue to plague the industry. “We in this country have got to get over this notion that if a job does not require a college degree, then it’s not a prestigious job,” said Basu, chief economist for the Associated Builders and Contractors on Construction Executive's midyear forecast webinar. He also is chairman & CEO of Sage Policy Group Inc., an economic and policy consulting firm based in Baltimore.
Total non-residential construction spending rose 19.8%, not adjusted for inflation, during the period between the start of the COVID-19 pandemic in February 2020 and May 2023, according to the U.S. Census Bureau. Manufacturing continues to lead all construction markets with a growth rate of 148.2% over that time period, while lodging is at the bottom, falling at a rate of 30.7%. “[Contractors] built a ton of hotel rooms in the five years preceding the pandemic, and business travel has just not come back aggressively,” said Basu.
The ABC construction confidence index suggests the industry remains confident that business will be strong for the next six months. “It does not appear that the industry is expecting the next year to be particularly challenging with respect to supporting profit margins,” he said.
Despite contractor confidence, Basu pointed to several indicators that the overall economy is heading for a downturn.
The price of a one-year Treasury bond continues to hold a higher interest rate than a 10-year bond, “screaming” a recession is coming, he said. Additionally, Basu pointed to an inventory cycle problem, as retailers such as Macy’s, Home Depot and Target reported lower earnings, which he expects to be further exacerbated by the restart of student loan payments in October.
“To really get this U.S. economy rejuvenated, [the Federal Reserve] needs to start cutting rates, but I don’t expect that to happen until some point next year,” said Basu. “I still believe a recession [is coming].”