AEM sounds optimistic note on construction

A report from the Milwaukee-based Association of Equipment Manufacturers (AEM) says despite financial press concerns that “could talk us into a recession,” recent United States construction sector activity figures point to potential staying power in the industry.

“Before Federal Reserve policymakers signaled a pause in the rate-raising campaign early in May, April U.S. housing starts rebounded and contractors’ infrastructure backlog grew," AEM's Larry Stewart says in the May report.

Regarding the April data, Robert Dietz, chief economist and senior vice president for housing policy at the Washington-based National Association of Home Builders (NAHB), comments, “A lack of existing inventory and stabilizing mortgage rates helped push single-family production up to the highest rate thus far in 2023 even as builders continue to deal with high construction costs, persistent labor shortages and tightening credit conditions for construction loans.”

AEM, which organizes the ConExpo-Con/Agg trade fair every three years, says the more than doubling of interest rates from a pandemic-related low in 2021 have “choked housing demand and driven an 18 percent plunge in new single-family housing starts since the prepandemic peak.”

Nonetheless, Stewart says, dollars spent on residential construction rose by 39 percent during that same stretch, and rising costs of building materials, including fabricated metal, drywall and lumber, played a role in that increase. “Builders do, however, continue to make significantly more money, devoting every input, from lots to labor, to a much higher proportion of high-value homes,” he adds.

Overall housing starts in April increased 2.2 percent to a seasonally adjusted annual rate of 1.40 million units, according to a report from the U.S. Department of Housing and Urban Development (HUD). Single-family starts increased 1.6 percent.

While the single-family start rate this April is more than 28 percent below the April 2022 figure, single-family starts have gradually improved since this January, AEM says. “This consistent growth is reflected in the NAHB/Wells Fargo Housing Market Index, a monthly reading of home builder confidence that crossed the key break-even threshold of 50 with the May survey,” Stewart writes.

After backlogs in the nonresidential sector declined to a seven-month low this March, the nonresidential Construction Backlog Indicator tracked by the Washington-based Associated Builders and Contractors (ABC) increased by 0.2 to 8.9 months this April. An ABC survey cites strength in the infrastructure category, where the reading is 0.1 months higher compared with April 2022.

Nonresidential construction spending has grown 19 percent since the onset of the pandemic, and all three readings in ABC’s Construction Confidence Index remain above the threshold of 50, indicating expectations of growth over the next six months, according to AEM.

“Based on ABC member sentiment, one would not be able to discern that interest rates are high, the nation’s banking sector is in tumult, politicians are arguing over the nation’s debt limit and recession fears remain pervasive,” ABC Chief Economist Anirban Basu says. “Despite many headwinds and an active news cycle, contractors continue to express confidence in the near term.”

Basu says bad news still is possible. “With credit conditions tightening, expectations are that private construction is poised for weaker times ahead,” he says. “Nonetheless, backlog expanded in April, as infrastructure contractors began to take on more public works projects. Moreover, despite rapidly rising compensation costs, more ABC contractors expect profit margins to expand as opposed to recede over the next six months, evidence of sufficiently strong demand for construction services to support pricing power.”