Tightening economic conditions contribute to Commercial and Multifamily Starts Losing Ground

HAMILTON, New Jersey — July 26, 2023 — New data from Dodge Construction Network found that the value of commercial and multifamily construction starts across the top 10 metropolitan areas of the U.S. fell 10% in the first half of 2023, relative to that of 2022. Nationally, commercial and multifamily construction starts fell 14% on a year-to-date basis through June.

Commercial and multifamily construction has suffered thus far into 2023 as tighter lending standards, higher interest rates, slowing demand and societal changes, such as continued remote work, impact the sector.

In the first half of 2023, the New York metropolitan area was the top market for commercial and multifamily starts at $10.8 billion, a 31% decrease from the first six months of 2022. In second was the Dallas, Texas, metropolitan area, totaling $6.7 billion in the first half of 2023, a 17% decline. The Atlanta, Georgia, metro area ranked third with $5.4 billion in starts — an 18% gain over 2022 on a year-to-date basis.

The remaining top 10 metropolitan areas through the first half of 2023 were:

• Miami, Florida, flat ($4.7 billion)
• Houston, Texas, up 29% ($4.7 billion)
• Los Angeles, California up 2% ($4.3 billion)
• Chicago, Illinois up 64% ($4.2 billion)
• Phoenix, Arizona, down 21% ($3.5 billion)
• Boston, Massachusetts, down 2% ($3.3 billion)
• Washington, D.C., down 43% to ($3.1 billion).

The top 10 metropolitan areas accounted for 39% of all commercial and multifamily starts in the United States in the first half of 2023, up from 37% in that of 2022.

Commercial and multifamily starts are comprised of office buildings, stores, hotels, warehouses, commercial garages and multifamily housing. Not included in this ranking are institutional projects (e.g., educational facilities, hospitals, convention centers, casinos, transportation terminals), manufacturing buildings, single family housing, public works and electric utilities/gas plants.

In total, U.S. commercial and multifamily building starts fell 14% to $130 billion on a year-to-date basis through six months. Multifamily starts lost 17%, declining to $61 billion, and commercial starts fell 11% to $70 billion. In the first half of 2023, across the top 10 metro areas, commercial building starts rose 1% to $27 billion, while multifamily starts fell 21% to $24 billion.

“The wind has gone out of the sails for the commercial and multifamily sectors,”

stated Richard Branch, chief economist for Dodge Construction Network. “Starts are likely to worsen still in the second half of the year, as interest rates head even higher. Tighter financial conditions and significant market shifts have led to precipitous declines in starts across many metropolitan areas. However, even as markets begin to recover next year, significant structural change in the sector could lead to a tepid recovery with levels well below what was seen before the pandemic.”

In the New York metropolitan area, commercial and multifamily construction starts fell 31% in the first six months of 2023 to $10.8 billion. Multifamily starts were down 39% following a robust first half of last year., with the largest multifamily projects to break ground being the $500 million 7112 Park Ave project and the $414 million North Cove mixed-use building. At the same time, commercial starts fell 11% due to a pullback in parking structures and retail, offsetting gains in hotel, warehouse and office construction. The largest commercial projects to get started in the first half of 2023 were the $100 million Rolex headquarters and the $94 million College Point Logistics Center.

Commercial and multifamily starts in the Dallas, Texas, metro area were down 17% to $6.7 billion on a year-to-date basis through June. Commercial starts fell 17%, despite gains in office and retail structures. The largest commercial projects to get underway during the first half of the year were the $154 million Aligned data center and the $119 million Google data center. Multifamily starts were down 18%, with largest multifamily project starts being the $268 million Knox mixed-use building and the $118 million first phase of the Alexan Frisco Brinkman Ranch apartments.

In the Atlanta, Georgia, metropolitan area, commercial and multifamily construction starts rose 18% to $5.4 billion during the first half of 2023. On a year-to-date basis, multifamily starts were down 23% from the first half of 2022. The largest multifamily projects to break ground during the first six months of the year were the $500 million 1072 W Peachtree mixed-use building and the $245 million 1077 Juniper Apartments. In the first six months of 2023, commercial starts rose 61% from the first six months of 2022, with all categories but retail posting gains. The largest commercial projects to get underway during the year were the $642 million first phase of the Facebook Stanton Springs data center and a $171 million data center.

Miami, Florida, commercial and multifamily starts during the first half of 2023 were on par with that of 2022 at $4.7 billion. Commercial starts in Miami gained 4% on a year-to-date basis through June due to a large increase in warehouse starts amid declines across all other sectors. The largest commercial projects to get started during the first half of 2023 were a $61 million warehouse and the $46 million Gaumard Scientific building. In the first half of 2023, multifamily starts fell 1% compared to that of 2022. The largest multifamily projects to get started through June 2023 were the $164 million second phase of the Baccarat Residences and the $160 million first phase of the Namdar mixed-use building.

The Houston, Texas, commercial and multifamily building starts rose 29% on a year-to-date basis through June to $4.7 billion. Commercial starts in Houston gained 24% in the first six months of the year with all categories posting healthy growth. The largest commercial projects to start during the first half of the year were the $77 million Port 99 warehouse and the $50 million FreezPak cold storage building. Multifamily starts meanwhile rose 40% in the first half of the year. The largest multifamily buildings to break ground in the first six months of 2023 were the $200 million DeisoMoss mixed-use building and the $99 million Residences on Westheimer.

Together, commercial and multifamily starts in the Los Angeles, California, metropolitan area grew 2% to $4.2 billion during the first half of 2023. During the first half of the year, multifamily construction fell 12%. The largest multifamily structures to break ground during the first half of 2023 were the $385 million 710 Broadway mixed-use building and the $150 million Ritz Carlton VEA Newport Beach. In the first six months of 2023, commercial starts moved 33% higher than the first six months of 2022, with all commercial categories posting an increase. The largest commercial projects to get started during the first half of the year were the $490 million JMB Century City Center office building and the $70 million 6381 Hollywood Blvd office building.

In Chicago, Illinois, commercial and multifamily starts were up 64% on a year-to-date basis through June 2023 to $4.2 billion. Multifamily starts were up 53%, through the first six months of 2023. The largest multifamily projects to break ground being the $190 million Albany Terrace and Irene McCoy Gaines apartment alteration project and the $140 million 1114 W Carroll Ave apartment building. In the first six months of 2023, total commercial starts rose 71% compared to the first six months of 2022. The gain was the result of a large increase in office starts, although hotel and retail construction also rose. The largest commercial projects to get underway during the first half of the year were the $1 billion Prime data center campus and the $330 million 917 W Fulton Market office building.

Phoenix, Arizona, commercial and multifamily starts during the first six months of 2023 were down 21% to $3.5 billion from the first half of 2022. Commercial starts in Phoenix fell 20% on a year-to-date basis through June with only office and retail increasing. The largest commercial projects to start during the first six months of 2023 were the $150 million QTS McDowell data center and the $100 million Prologis Commerce Park Building #3 warehouse. In the first half of 2023, multifamily construction fell 24% from the first six months of 2022. The largest multifamily buildings to get started were the $100 million Portico condos and the $88 million RD Kirkland apartments.

Boston, Massachusetts, commercial and multifamily construction starts dropped 2% to $3.3 billion during the first half of 2023. Commercial starts moved 5% higher on a year-to-date basis through June due to an increase in office and parking construction. The largest commercial projects to break ground during the first six months of 2023 were the $228 million Landmark Center/401 Park office building and the $130 million Reservoir Woods East office building. Multifamily starts fell 7% on a year-to-date basis through June 2023. The largest multifamily structures to break ground so far this year were the $175 million third phase of the 135 Broadway/MXD residential building and the $132 million 1690 Revere Beach Parkway residential building.

In Washington, D.C., commercial and multifamily starts in the first half of 2023 were down 43% from the first half of 2022 to $3.1 billion. Multifamily starts lost 45% on a year-to-date basis through June. The largest multifamily projects to get underway during the first half of the year were the $215 million Four Season condo building and the $100 million Residences at Forest Glen. Commercial starts were down 42% during the first six months of 2023, with warehouse being the only category to post a gain. The largest commercial projects to break ground during the first half of the year were the $500 million Smithsonian South Campus Castle renovation and the $157 million first phase of the NVAL3 data center.

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Most construction categories lower in the month; single family starts
are a bright spot

HAMILTON, NJ —July 21, 2023 — Total construction starts fell 9% in June to a seasonally adjusted annual rate of $1 trillion, according to Dodge Construction Network. Nonresidential starts led the downturn, falling 14%. Nonbuilding starts fell 9%, and residential starts lost 4%

Year-to-date through June 2023, total construction starts were 5% below that of 2022. While residential and nonresidential starts were down 24% and 2%, respectively, nonbuilding starts gained 29%. For the 12 months ending June 2023, total construction starts were 9% higher than that of 2022. Nonbuilding starts were 34% higher, and nonresidential building starts gained 25%. However, on a 12-month rolling basis, residential starts posted a 17% decline overall.

“Construction starts are oscillating — up one month and down the next,” said Richard Branch, chief economist for Dodge Construction Network. “The presence, or absence, of mega-projects is a key influencer in this trend. Nevertheless, high interest rates and tightening lending standards are leading to uncertainty among owners and developers, also creating hesitation among stakeholders, leading them to carefully assess whether projects will break ground. These conditions will persist through the remainder of the year — meaning little forward motion in construction starts.”

Nonbuilding
Nonbuilding construction slipped 9% in June to a seasonally adjusted annual rate of $317 billion. Despite a strong showing in May, utility/gas plants fell 43%, and highway and bridge starts dropped 22%. Conversely, environmental public works starts gained 1%, and miscellaneous nonbuilding starts more than doubled due to the start of a large stadium project. Year-to-date through June, nonbuilding starts gained 29%. Utility/gas plants rose 61%, and miscellaneous nonbuilding starts were up 60%. Highway and bridge starts also gained 19%, along with environmental public works rising 14%.

For the 12 months ending June 2023, total nonbuilding starts were 34% higher than that of  2022. Utility/gas plant starts rose 62%, and miscellaneous nonbuilding starts were 45% higher. Highway and bridge starts were up 25%, and environmental public works rose 24% on a 12-month rolling sum basis.

The largest nonbuilding projects to break ground in June were the $2.6 billion Matterhorn Express Pipeline in Texas, the $1.4 billion Buffalo Bills stadium in Orchard Park, New York, and the $930 million Bissell & Lemay wastewater treatment plant in St. Louis, Missouri.

Nonresidential

Nonresidential building starts shrank 14% in June to a seasonally adjusted annual rate of $348 billion following an aggressive growth in manufacturing starts in May. Commercial starts fell 6% with gains in office and hotel offset by a pullback in warehousing and parking structures, while manufacturing starts lost 67%. Institutional starts gained 15% in June due to healthcare and airport terminal work. On a year-to-date basis through June, total nonresidential starts were 2% lower than that of 2022. Institutional starts gained 9%, while manufacturing and commercial starts fell 6% and 11%, respectively.

For the 12 months ending June 2023, total nonresidential building starts were 25% higher than that ending June 2022. Manufacturing starts were 76% higher, institutional starts improved 21%, and commercial starts gained 9%.

The largest nonresidential building projects to break ground in June were the $2.6 billion JetBlue Terminal 6 at JFK airport in Jamacia, New York, the $625 million first phase of the GlobiTech Semiconductor plant in Sherman, Texas, and a $558 million hospital tower at Strong Memorial Hospital in Rochester, New York.

Residential

Residential building starts fell 4% in June to a seasonally adjusted annual rate of $344 billion. Single family starts gained 8%. Multifamily starts lost 23%. On a year-to-date basis through June 2023, total residential starts were down 24%. Single family starts were 27% lower, and multifamily starts were down 17%.

For the 12 months ending in June 2023, residential starts were 17% lower than that of 2022. Single family starts were 26% lower, while multifamily starts were up 2% on a rolling 12-month basis.

The largest multifamily structures to break ground in June were the $500 million 1072 W Peachtree building in Atlanta, Georgia, the $450 million Pendry-One Ashley condo tower in Tampa, Florida, and the $345 million Merchant Building in Columbus, Ohio.

Regionally, total construction starts in June fell in all regions except the West and Northeast.

Watch Chief Economist Richard Branch discuss June Construction Starts here.

June 2023 CONSTRUCTION STARTS

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According to the U.S. Bureau of Labor Statistics’ latest release of the Producer Price Index (PPI) for June, the PPI for final demand experienced a modest increase of 0.1%, after a decline of 0.4% in May. This upturn can be primarily attributed to a consistent 0.2% increase in the index for final demand services, mirroring the previous month’s trend, while prices for final demand goods remained steady. Over the 12-month period ending in June, the unadjusted index for final demand showed a modest advancement of 0.1%.

In June, the index for final demand less foods, energy, and trade services saw a 0.1% increase, signaling a steady upward trend following no change in May. However, it’s important to note that the index for final demand transportation and warehousing services experienced a decline of 0.9%. This decline brings some welcomed relief in costs for some materials and services. On the goods front, prices for final demand goods remained unchanged in June, following a decline of 1.6 % in May. The graph below illustrates the year-over-year percent change in a composite index of construction materials, represented by the red line. We observe a noticeable upturn in this trend, which raises concerns as it typically precedes bid price changes (blue line) by approximately 12 months. If this upturn persists, it could potentially lead to an increase in bid prices in 2024, which might pose challenges for the construction industry. It is worth noting that certain sectors, such as the lumber industry, have continued to experience disinflationary trends. This is particularly promising for the residential sector, which heavily relies on lumber, creating an optimistic outlook for the housing market’s anticipated growth in the upcoming year. However, the index for final demand energy showed a noteworthy increase of 0.7%. This indicates potential cost increases in the production of certain materials, like cement (13.3%) and concrete (11.3%), which have continued to rise.

In summary, the June PPI release reveals a slight increase in final demand prices, primarily influenced by services excluding trade, transportation, and warehousing. This finding aligns with expectations of another Federal Reserve rate hike at their upcoming July meeting. The construction industry, facing ongoing challenges, will continue to grapple with the persistent upward trend in prices and the impact of inflation. While there are signs of improvement, inflation remains a stubborn issue that requires careful management and strategic approaches from the Fed.

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Continued stream of data center and life science lab projects keeps Index from further lows

HAMILTON, N.J. – July 11, 2023 — The Dodge Momentum Index (DMI), issued by Dodge Construction Network, declined 2.5% in June to 197.3 (2000=100) from the revised May reading of 202.4. Over the month, the commercial component of the DMI rose 3.1%, while the institutional component sunk 10.5%.

“A deceleration in institutional planning caused the Momentum Index to decrease in June,” said Sarah Martin, associate director of forecasting for Dodge Construction Network. “Project activity in this segment pulled back from the robust highs of the last three months but continued to dwarf year-ago levels. In contrast, growth in the commercial segment may be fleeting, as the continued elevation in interest rates and increasingly tight lending standards weigh down the sector in the latter half of the year.”

Commercial planning in June remained afloat alongside an uptick in data center and hotel planning projects. Institutional planning, on the other hand, was driven lower by a decrease in education and healthcare activity. Year over year, the DMI remains 25% higher than in June 2022. The commercial and institutional components were up 17% and 39% respectively.

A total of 22 projects valued at $100 million or more entered planning in June. The largest commercial projects to enter planning included the $335 million Queensbridge Collective Office Tower in Charlotte, North Carolina and the $280 million Old Potomac Church Data Center in Stafford, Virginia. Bolstering the institutional planning queue was the $710 million Medford Life Science Park project in Medford, Massachusetts and the $157 million Center of Innovation building in Emeryville, 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 June’s DMI here.

June 2023 DODGE MOMENTUM INDEX

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Both residential and nonresidential construction employment were up in June.

The Bureau of Labor Statistics (BLS) reported that nonfarm payrolls climbed by a seasonally adjusted 209,000 in June, falling below economists’ expectations. The unemployment rate fell to 3.6%, while the average hourly earnings rose 4.4% on a year-over-year (y/y) basis, up from 4.3% y/y in May.

Employment in construction was up 23,000 in June. Thus far this year, construction has added a monthly average of 15,000 jobs. In June, residential specialty trade contractors posted the largest monthly increase in employment (+10,000), followed by employment in heavy and civil engineering construction (+7,300), nonresidential building construction (+5,400) and residential building construction (+800).

The consecutive monthly increase in residential building construction employment is an indication that single family home construction might be past the trough of the cycle and could show improvement in the second half of the year. The BLS report also shows that the average hourly earnings in construction were up 4.7% y/y in June, slightly faster than the pace for the overall economy. Significant pressure on construction wages should be expected over the next few months, as construction labor remains in short supply and job openings continue to ramp up.

Employment in construction was up 2.8% year-over-year in the first half of 2023, defying the higher interest rate environment. The BLS U.S. jobs report is still in line with another Federal Reserve rate hike at the July meeting. Higher interest rates for a longer period and tighter lending standards do not bode well for construction starts and employment over the next 12 months. In particular, commercial and income-property construction starts will be hardest hit.

The post Construction Employment Continues to Defy Higher Interest Rate Environment appeared first on Dodge Construction Network.

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The Bureau of Labor Statistics Job Openings and Labor Turnover Survey estimates that the number of US Job openings fell to a seasonally adjusted 9.8 million in May, a 5% decline from April. While the US job market as a whole may seem to be cooling off after a stronger than expected April, the construction labor market continues to display strength with another positive month of job postings. The sector increased openings by 19,000 in May, bringing total construction openings to 366,000. In fact, the construction category was one of only six in the private sector that saw positive movement in openings from April to May.

One interesting point to highlight in the report is just how divided the US labor market is regionally. The southern region has consistently posted nearly double the openings of any other region in the US at around 4 million total openings for all sectors, while the Northeast lags behind with an average of only 1.5 million from February to May of this year. This goes to show that though some regions and sectors of the US economy may feel recessionary, the US will continue to avoid a recession in 2023 as strength in others persists.

The construction industry will still be feeling the heat this summer even though openings and job growth for the sector continue to climb. Because labor remains in short supply, construction wages and the threat of project delays are also on the rise.

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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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