The Bureau of Economic Analysis (BEA) has released the final estimate for the United States’ Gross Domestic Product (GDP), shedding light on the resilience of the U.S. economy despite challenges such as the Federal Reserve’s interest-rate hikes. The latest figures demonstrate new growth, with real GDP expanding at an annual rate of 2.0 percent in the first quarter of 2023, surpassing the previous estimate of 1.3 percent.

The positive shift in GDP was driven by upward revisions in consumer spending and exports. These upward revisions indicate that households were willing to spend on goods and services, while businesses managed to successfully sell more products to other countries. Furthermore, imports, which are subtracted in the calculation of GDP, were revised down. This implies growth in the consumption of goods and services that were domestically produced, which contributes to the overall strength and health of the economy. While federal government spending and nonresidential fixed investment— which includes the construction and renovation of office buildings, retail spaces, warehouses, and other commercial properties— experienced downward revisions, it is crucial to note that the overall growth trajectory of the economy remains positive.

The revised estimate for U.S. GDP growth in the first quarter reinforces that the U.S. is a long way off from recession despite significantly tighter monetary policy and further expected tightening from the Fed. However, it is important to note that higher interest rates over time can have implications for future construction activity, particularly in the residential and commercial sectors. Considering the information provided by the Dodge Momentum Index (DMI), which highlights the recent trends in planning activity, we observe a dip in May due to sustained weakness in commercial planning. This dip highlights the ongoing downward trajectory in the DMI observed in previous months. It is expected that the sustained elevation in the federal funds rate and tighter lending standards will likely constrain growth in the DMI during the latter half of 2023. Despite these factors, the overall outlook remains mildly positive, primarily due to the positive impacts of the Infrastructure Investment and Jobs Act (IIJA), the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act, and IRA. These legislative initiatives are creating favorable conditions in the construction industry and the broader economy, with a particular emphasis on benefiting the manufacturing and nonbuilding sectors.

The post Revised Third Estimate: US GDP Growth Shows Resilience Amidst Evolving Economic Landscape appeared first on Dodge Construction Network.

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Manufacturing and infrastructure lead the sector with large gains, residential sees double-digit decline

HAMILTON, NJ —June 20, 2023 — Total construction starts rose 8% in May to a seasonally adjusted annual rate of $1.11 trillion, according to Dodge Construction Network. Nonresidential starts rebounded following the decline in April, improving 8% thanks to a sizeable gain in manufacturing starts. During the month, nonbuilding starts improved by 24%, while residential lost 4%.

On a year-to-date basis through May, total construction starts were 6% below the first five months of 2022. Residential starts were down 25%, nonresidential starts were 1% lower, and nonbuilding starts gained 25%. For the 12 months ending May 2023, total construction starts were 9% higher than the 12 months ending May 2022. Nonbuilding starts were 30% higher, while nonresidential building starts gained 26%. However, on a 12-month rolling basis, residential starts posted a 15% decline.

“May’s data is another sign that the construction sector is slowly splitting in two,” said Richard Branch, chief economist for Dodge Construction Network. “Public dollars are flooding into the manufacturing and infrastructure sectors, leading to significant growth over the last year. Meanwhile, the mostly private sectors of the building market like offices, multifamily and retail are struggling under the weight of higher interest rates, tightening lending standards and declining demand. The second half of the year is shaping up to be a challenging one. But, the insulation provided by manufacturing and infrastructure starts will stabilize the industry and lead to modest overall growth.”

Nonbuilding
Nonbuilding construction starts rose 24% in May to a seasonally adjusted annual rate of $347 billion. Utility/gas plants powered the increase as it jumped 53% over the month. Street and bridge starts moved 22% higher, and environmental public works increased 3%. Meanwhile, miscellaneous nonbuilding starts showed no change. Year-to-date through May, nonbuilding starts gained 25%. Utility/gas plants rose 76%, and miscellaneous nonbuilding starts were up 27%. Highway and bridge starts gained 16%, and environmental public works were up 11% on a year-to-date basis.

For the 12 months ending May 2023, total nonbuilding starts were 30% higher than the 12 months ending May 2022. Utility/gas plant starts rose 68%, and miscellaneous nonbuilding starts were 27% higher. Highway and bridge starts were up 22%, and environmental public works rose 18% on a 12-month rolling sum basis.

The largest nonbuilding projects to break ground in May were the $5.3 billion first train for the Port Arthur LNG project in Port Arthur, Texas, the $1.5 billion Southeast Connector Interchange highway project in Fort Worth, Texas, and the $925 million Amtrak/Metro Norwalk Bridge Replacement project in Norwalk, Connecticut.

Nonresidential

Nonresidential building starts rose 8% in May to a seasonally adjusted annual rate of $412 billion. The driving force behind the increase was manufacturing starts, which more than doubled in May. Commercial starts tumbled 20% in May due to a sharp pullback in office and retail starts, while hotel starts moved higher. Institutional starts fell just 1% in May with education starts falling, but healthcare increasing. On a year-to-date basis through May, total nonresidential starts were 1% lower than that of 2022. Institutional starts gained 12%. Meanwhile, manufacturing starts were 11% lower, and commercial starts were down 7%.

For the 12 months ending May 2023, total nonresidential building starts were 26% higher than the 12 months ending May 2022. Manufacturing starts were 72% higher, institutional starts improved 22%, and commercial starts gained 12%.

The largest nonresidential building projects to break ground in May were the $1.9 billion Steel Dynamics aluminum plant in Columbus, Mississippi, the $1.9 billion Eli Lilly & Co facility in Indianapolis, Indiana, and the $1.5 billion Ford Ohio EV plant in Sheffield.

Residential

Residential building starts lost 4% in May to a seasonally adjusted annual rate of $356 billion. Single family starts retreated, falling 2% in May following four consecutive monthly gains. Multifamily starts shed 8%. On a year-to-date basis through May 2023, total residential starts were down 25%. Single family starts were 31% lower, and multifamily starts were down 12%.

For the 12 months ending in May 2023, residential starts were 15% lower than that of  2022. Single family starts were 26% lower, while multifamily starts were up 9% on a rolling 12-month basis.

The largest multifamily structures to break ground in May were the $414 million North Cove mixed-use building in New York, New York, the $190 million Albany Terrace and Irene McCoy Gains apartments in Chicago, Illinois, and the $190 million The Kaye Luxury apartment tower in Seattle, Washington.

Regionally, total construction starts in May fell in the Northeast and West, while gaining in the Midwest, South Atlantic and South Central regions.

Watch Chief Economist Richard Branch discuss May Construction Starts here.

May 2023 CONSTRUCTION STARTS

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The U.S. Bureau of Labor Statistics reported a decline of 0.3% in May for the PPI for final demand, following a 0.2% increase in April and a 0.4% decrease in March. However, on an unadjusted basis, the index rose by 1.1% over the 12 months ending in May.

From a construction perspective, prices for final demand goods decreased by 1.6%, primarily due to a 6.8% drop in energy prices. Industries relying heavily on energy resources can expect reduced expenses during the construction process. Secondly, transportation and warehousing services experienced a decline of 1.4%. This indicates that transportation costs have decreased, which could potentially lead to cost savings in terms of material and equipment delivery for the construction industry.

The construction industry still faces significant challenges related to pricing dynamics. Inflation in non-food, non-energy final demand signals price increases for specific construction materials such as cement, concrete, and plumbing fixtures. This trend is depicted in the graph below. However, it’s worth noting that the lumber industry continues to exhibit a downward trend due to the weak single-family market, and now structural metal and plastic products are also experiencing deflationary pressures.

Also yesterday, the Federal Reserve decided to maintain the federal funds rate in the range of 5 to 5-1/4%, refraining from further rate increases after ten consecutive hikes. This wait-and-see approach is consistent with the theme that core inflation is improving. However, it hasn’t come down quick enough and based on the statement accompanying the decision it seems likely that the Fed will raise rates again – potentially at the July meeting. The Fed emphasized their commitment to monitoring labor market conditions, inflation pressures, and global economic developments, which will play a vital role in shaping future policy decisions.

Regardless of the decision to raise rates in upcoming meetings the Fed is likely near the end of the tightening cycle, with inflation slated to improve in the back half of 2023 as shelter prices work their way into the inflation picture. As interest rates stabilize, they should support some construction projects requiring financing. Additionally, while lower energy and transportation prices may provide some cost relief, potential fluctuations in construction materials might create challenges for project costs – particularly for income properties where the demand challenges are significant.

The post Producer Prices Fall, Fed Holds; What’s Next? appeared first on Dodge Construction Network.

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Commercial and institutional planning face divergent trends approaching the second half of 2023

HAMILTON, N.J. – June 7, 2023 — The Dodge Momentum Index (DMI), issued by Dodge Construction Network, fell 2.0% in May to 180.5 (2000=100) from the revised April reading of 184.1. Over the month, the commercial component of the DMI fell 6.1%, while the institutional component improved 5.6%.

“The DMI dipped in May amid sustained weakness in commercial planning activity,” stated Sarah Martin, associate director of forecasting for Dodge Construction Network. “Conversly, institutional planning steadily improved over the month as research and development laboratories and hospital projects steadily entered planning. Sustained elevation in the federal funds rate and tighter lending standards will likely constrain growth in the DMI over the second half of 2023; however the index remains above the historical average. This paints an optimistic landscape for non-residential construction in mid-2024, as the economy recovers and the Fed begins to pull back rates.”

Commercial planning in May was negatively impacted by continued weakness in office and hotel planning activity. Institutional planning accelerated alongside steady growth in education, health and amusement projects. Year over year, the DMI remains 11% higher than in May 2022. The commercial and institutional components were up 7% and 18%, respectively.

A total of 30 projects valued at $100 million or more entered planning in May. The largest commercial projects included Buildings 3 and 4 of the Blue Sky Data Center project in Omaha, Nebraska, each valued at $466 million, and the $400 million Prime Data Center building in Avondale, Arizona. Leading the way on the institutional side were the $500 million Tennessee Performing Arts Center in Nashville, and the $440 million Rady Children’s Hospital ICU/EMS Pavilion in San Diego, California.

The DMI is a monthly measure of the initial report for nonresidential building projects in planning, shown to lead construction spending for nonresidential buildings by a full year.

Watch Associate Director of Forecasting Sarah Martin discuss May’s DMI here.

May 2023 DODGE MOMENTUM INDEX

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Higher employment led by nonresidential sector.

According to the establishment survey of the Bureau of Labor Statistics (BLS), nonfarm payrolls rose by a seasonally adjusted 339,000 in May, far exceeding expectations and marking the 29th straight monthly increase in employment. The BLS household survey shows that the nation’s unemployment rate rose from April’s 3.4% to 3.7%, as the number of unemployed households rose.

Construction employment rose by 25,000 in May, following an increase of 13,000 in April. Employment gains were broad-based with gains in nonresidential sectors amounting to 22,100. Over the prior 12 months, construction had added a monthly average of 17,000 jobs. The May increase in residential building construction (+2,400 jobs) was particularly heartening and perhaps another sign that single family home construction is at the bottom of the cycle and will show improvement in the second half of the year.

The construction unemployment rate dropped to 3.5% in May, from 4.1% a month earlier. Meanwhile, average hourly earnings in construction increased 0.4% in May (+5.1% on a year-over-year basis), faster than overall wage growth as construction labor continues to be scarce in the face of strengthening starts activity.

Despite its resiliency, construction employment faces strong headwinds in the short term. The BLS jobs report increases the odds of another Federal Reserve rate hike at the June meeting. Higher interest rates for a longer period, tighter lending standards and turmoil in the banking sector do not bode well for construction starts and employment. Job cuts announcements in the sector, as reported by Challenger, Gray & Christmas, eased in May but are significantly higher in the first five months of this year (+2,585) than during the same period a year earlier (+1,150). Such announcements could increase over the next several months.

The post Construction Employment Picks Up in May appeared first on Dodge Construction Network.

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The Bureau of Labor Statistics’ US job openings data for April poses an interesting break from the narrative that the labor market may be cooling down. From March to April there was a total increase of 358,000 job openings in the US (from 9.75 Million to 10.1 Million) along with a decrease in layoffs/discharges of over 260,000 (from 1.85 Million to 1.58 Million). The construction sector alone saw an increase in openings of 68,000, bringing the total openings for the industry to its 12-month average at 383,000. This represents a 21.6% increase in job openings from March of this year. While hiring in the construction sector saw a slight decrease of 27,000, the layoffs/discharges decreased rather significantly from 302,000 in March to only 189,000 in April. Despite the uncertainty surrounding the banking crisis, debt ceiling debate, and the ongoing labor shortages, construction industry employment and job openings remain resilient, propped up by activity in the public, high-tech, and health-related construction sectors. This supports the Dodge Construction Network forecast that 2023 construction starts growth will be more subdued compared to 2022 highs but will remain positive. As these situations develop, make sure to stay tuned to Dodge Construction Network starts to get the most up to date news on the industry’s reaction to these uncertain times.

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