‘Tougher times ahead’ for construction as July backlogs fall

Dive Brief:

Construction contractors’ backlog declined for a second consecutive month in July, while profit expectations fell further into negative territory, as construction pros braced for more challenging economic conditions ahead, according to a release from Associated Builders and Contractors.
ABC’s Construction Backlog Indicator, which tracks jobs contractors have won but haven’t started yet, declined in July to 8.7 months, 0.3 months below its May peak. Meanwhile, the profit component of its Construction Confidence Index fell to 47.5. Any score below 50 indicates a pessimistic outlook, and the tracker has fallen three months in a row.
“The level of construction activity has begun to fade,” said ABC Chief Economist Anirban Basu in the release. “Higher borrowing costs, weak commercial real estate fundamentals and the reluctance of many project owners to bear the full brunt of higher construction materials prices and rising compensation costs are pushing profit margins lower and driving pessimism higher.”

Dive Insight:

The tandem declines provide more evidence that the Federal Reserve’s campaign to raise interest rates is directly impacting construction. U.S. GDP contracted over two consecutive quarters in the first half of 2022 — a common, if simple, definition of a recession.

A graph shows the ABC's Construction Backlog Indicator from 2012 through July 2022. — ABC Construction Backlog Indicator & Construction Confidence Index

Courtesy of Associated Builders and Contractors

But Basu said the data doesn’t necessarily indicate that a recession has begun in the nonresidential construction sector, since most contractors are still taking on as much work as they can handle.

“It is simply too soon to conclude that the nonresidential construction industry has entered recession despite recent declines in backlog,” Basu said. “For now, many contractors continue to operate at capacity and are actively looking to hire additional workers to expand capacity.”

Indeed, in the South, backlog actually shot up to 11.6 months in June, its second consecutive increase. Backlog was also up 0.4 months in the Northeast.

Despite those gains, given the outlook for lower profits, Basu noted that “a growing number of contractors are preparing for tougher times ahead.”