Economic Strength in Construction Shows No End in Sight

A couple of issues ago, I wrote about how we are willing ourselves into a recession even as the economic indicators point in a different direction. In recent months, we have studied a large variety of economic indicators as we prepared to launch our AVP Pulse Index in cooperation with our sister publication, Rock Products. Like so many periods in the past, this is an anxious time in the economy as we try to understand its direction, and despite the positive and robust indicators, worry abounds about our economic future and the threat of sliding into recession.

So a couple of days before this went to press, the news comes out that the economy grew 2.9 percent in the fourth quarter of 2022. One publication’s headline clearly sums up the current sentiment conundrum: “U.S. GDP rose 2.9 percent in the fourth quarter, more than expected even as recession fears loom.” 

Really? My frustration is the way that even the slightest downward indicators are severely overblown by the popular business press, adding to worries about a recession. For example, much drum-beating was made about U.S. households turning cautious at the end of last year, cutting spending during the holiday shopping season and increasing savings. Credible news sources said this was adding to signs of an economic slowdown.

Consumer spending fell a seasonally adjusted 0.2 percent in December from the prior month, with one publication calling this a “sharp decline.” What does that mean, though? Translated, it says that consumers maintained 99.8 percent of their previous spending compared to the prior month. How can that metric translate into a measurable slowdown, when I see it as within the margin of error? And the pullback in spending came as inflation cooled, giving consumers some relief from rapidly rising prices—a great trend for the economy. Households cut spending on goods as prices fell for gasoline and other energy products, while they increased spending on services.

As we zero in on our own sector of the economy, construction in general and concrete construction in particular, so many of the indicators paint a different picture. The Bureau of Labor Statistics reports that seasonally adjusted construction employment rose from November to December in 30 states and the District of Columbia. What’s more, total construction starts blew the barndoors off, jumping 27 percent from November to December at a seasonally adjusted annual rate, and 15 percent for all of 2022 compared to 2021. 

And while we all acknowledge the impact of rising interest rates on the cyclical housing market, which is now experiencing a cooling-off after a blistering run-up during the pandemic, all other construction segments show amazing strength. Nonresidential building starts increased 51 percent for the month and 38 percent for the full year, with manufacturing starts up 596 percent and 185 percent, respectively; institutional, 11 percent and 19 percent; and commercial, -10 percent and 25 percent. Nonbuilding starts rose 30 percent and 19 percent, respectively, with utility/gas starts up for the month and up 19 percent for the full year; miscellaneous, 19 percent and 0; highway and bridge, 10 percent and 25 percent; and environmental public works, -4 percent and 15 percent. Not surprisingly, residential starts were flat for the month and down 3 percent for the full year, with single-family down 5 percent and 13 percent, respectively, and multifamily up 8 percent and 25 percent.

Another indicator is the all-important jobs market. Despite tens of thousands of layoffs being announced in the tech sector, which is merely reflective of balancing out the over-hiring spree that took place during the pandemic, the labor market remains tight with unemployment at 3.5 percent, matching a half-century low. Jobless claims, a proxy for layoffs, are holding near historic lows despite the spread of layoff announcements.

In my mind, all arrows are pointing in the right direction. For our industry, hiring remains a challenge, as does the purchase of capital equipment where shortages remain with little relief in sight. Given the outlook for the construction economy, our call is to keep investing in labor and equipment, as our industry has a long run ahead of it.

Pierre G. Villere serves as president and senior managing partner of Allen-Villere Partners, an investment banking firm with a national practice in the construction materials industry that specializes in mergers & acquisitions. He has a career spanning almost five decades, and volunteers his time to educating the industry as a regular columnist in publications and through presentations at numerous industry events. Contact Pierre via email at [email protected]. Follow him on Twitter – @allenvillere.