Fasten your seat belts and enjoy the ride.
Like airline travelers bracing for expected turbulence, the construction industry is preparing for a tricky operating environment in 2024.
On the upside, the economy will continue to grow, although at a slower pace.
Consumers and businesses are both feeling fairly optimistic, unemployment remains low, capital investments are plugging along at a healthy pace, supply chains are improving and the all-important housing market is burgeoning.
Throwing cold water on the good times, though, is a significant downer that no one can control: Higher interest rates established by the Federal Reserve to control inflation are putting a damper on business activity. Economists are taking note by lowering expectations for the next 12 months.
“We expect real GDP to grow 1.4 percent in 2024,” says Bernard Yaros Jr., assistant director and economist at Moody’s Analytics.
That’s slower than the 2.1 percent increase expected when 2023 numbers are finally tallied, and below the 2 to 3 percent considered emblematic of normal business growth. (Gross Domestic Product, the total value of the nation’s goods and services, is the most commonly accepted measurement of economic growth. “Real” GDP adjusts for inflation.)
Slowing economic activity will affect the bottom line. Moody’s Analytics expects a decline of 4.5 percent in corporate profits for 2023 and only a modest recovery of 0.3 percent in 2024.
The construction sector will feel similar downward pressure.
“A major issue for construction is that inflation remains problematic and interest rates are likely to stay higher for longer,” says Anirban Basu, chairman and CEO of Sage Policy Group. “That impacts project financing.”
Basu notes that the economy is still experiencing inflationary pressures from energy prices, wages and consumer spending. Basu sees something of a mixed bag for the industry.
“Heretofore, construction companies in all sectors have been busy,” he says. “But I think what you’ll see going forward is that some contractors will get even busier while others will see their revenues begin to fade.”
The future will be bright for those contractors aligned with mega projects in infrastructure and computer chip manufacturing. The picture is less bright for other contractors aligned to markets such as offices, hotels and shopping malls.
“We know we have many millions of square feet of distressed office inventory in this country that frustrates new construction,” Basu says.
“Many owners of these office buildings are taking enormous losses on the value of their properties and are having to refinance their debts at a time when interest rates are high and bankers are reluctant to expose themselves to the vagaries of commercial real estate.”
Related: Construction employment up in September; industry headwinds remain