Dive Brief:

• Nonresidential construction planning dipped in August, providing a further sign that rising interest rates and fear of a pending recession is stalling upcoming projects.
• The Dodge Momentum Index, which broadly measures activity in the planning stages for new nonresidential building projects and leads spending in the sector by a full year, fell 1.2% in August. It was weighed down by a 5.2% decline in the institutional sector, which includes education, healthcare, transportation and public and religious buildings.
• Compared to a year ago, however, the index was still significantly positive, up 14% from August 2021. The commercial component, which includes retail, warehouses, office, hotels and parking garages, was 16% higher than 12 months earlier, with institutional projects 10% higher.

Dive Insight:

In July, the index reached a 14-year high, and August’s reading just more than a percentage point below that apex can still be interpreted as positive, particularly as a leading indicator for spending in the next 12 months, Dodge said in a release.

“This indicates continued confidence from owners and developers that nonresidential building projects will be realized in the coming year,” said Sarah Martin, senior economist at Dodge Data & Analytics. Yet, Martin conceded the softening reflected the potential for slower construction activity ahead.

“Weaker economic conditions and rising interest rates, however, may grind down overall consumer and business confidence as we move into 2023 — translating into fewer nonresidential building projects breaking ground,” Martin said in the release.

In a bright spot, commercial planning in August was led by an increase in hotel projects, a sector that was particularly hard hit during the pandemic.

Dodge said a total of 26 projects with a value of $100 million or more entered planning in August.

They included:

• The $400 million Two Tower office building in Chicago.
• The $300 million phase 2 of the Sungate Logistics Park in Daytona Beach, Florida.
• The $275 million Aligned Data Center in Sterling, Virginia.
• The $360 million Scripps Mercy Hospital expansion in San Diego.
• The $275 million Triton Center redevelopment in San Diego.
• The $275 million in improvements for Okemos Public Schools in Meridian Charter Township, Michigan. 

Other indicators

Dodge’s results reflect a similar slowing growth rate in the Architectural Billings Index, another widely followed leading indicator for construction activity. In August, the American Institute of Architects announced its July reading had decelerated again, following a decrease in June.

AIA said 42% of firms consider stalled, delayed, or canceled projects to be at least a somewhat serious issue.

“With a variety of economic storm clouds continuing to gather, we are likely looking at a period of slower growth going forward,” the AIA wrote. “In addition, inquiries into new projects also continued to slow this month.”

In addition, the Federal Reserve released its Beige Book report Wednesday for the summer months through August, an informal reading of economic conditions across different regions of the country.

After indicating some pullback in construction activity in its previous report, it found prices for construction materials were still high, even as other commodities fell.

"While manufacturing and construction input costs remained elevated, lower fuel prices and cooling overall demand alleviated cost pressures, especially freight shipping rates," the report said.

That outlook could provide more evidence for the Fed’s Open Market Committee to raise a key interest rate by another 0.75% later this month, as it is widely expected to do in its war against inflation.