Contractors confident in the face of falling backlog

Dive Brief:

Construction backlog dropped 0.2 months to 9.0 in January due to concerns around financing, according to Associated Builders and Contractors.
Despite the decline in January, backlog remains one month higher than in January 2022 and 0.1 month higher than in February 2020, the month before the COVID-19 pandemic hit the economy, according to the report.
“The U.S. economy continues to fend off recession,” said Anirban Basu, ABC chief economist. “Some economists have concluded that rather than a hard or soft landing, the U.S. economy is headed for ‘no landing,’ meaning that economic growth will continue despite rising interest rates.”

Dive Insight:

Contractor confidence rebounded in January to a level not seen since the first half of 2022 despite elevated borrowing costs, worker shortages and a weak economic outlook, said Basu.

ABC’s construction confidence index for sales, profit margins and staffing levels all increased in January. The three readings indicate expectations of growth over the next six months, according to the report.

The highest nominal reading of the three was in the staffing category, indicating strong confidence among contractors that they will increase their payroll ranks in the next six months. The construction industry added 25,000 jobs in January, according to an ABC report. Still, the industry will need to hire an estimated 546,000 workers in 2023 in order to meet demand.

Meanwhile, the construction unemployment rate jumped to 6.9% in January, while unemployment across all industries declined from 3.5% in December to 3.4% last month, according to a previous release from ABC.

“[The] jobs report strongly suggests that the Federal Reserve has more work to do,” said Basu. “Associated upticks in borrowing costs increase the likelihood of a recession sometime later this year.”

That means the Federal Reserve will likely maintain higher borrowing costs for a longer period, said Basu. That could cause dips in backlog and contractor confidence levels, especially for those that specialize in privately financed projects.

“Many contractors may shrug off such concerns given current elevated backlog,” said Basu. “But the outlook may dim later this year as the cost of project financing continues to rise, setting the stage for what could be a meaningfully weaker 2024, at least in construction segments that are primarily privately financed.”