Contractors are continuing to hire as they operate at capacity, but a potential recession could impact the economy next year, said Anirban Basu, chief economist for Associated Builders and Contractors.

“I think we’re headed for recession in 2023, and I do not believe it will be a mild one,” he said while presenting a quarterly construction economic update and forecast webinar Oct. 12.

Construction wages rose 5.5% over 12 months as of September, the fastest growth in about 40 years, Basu said. Contractors have been busy hiring, with about 407,000 construction job openings in August, according to the U.S. Bureau of Labor Statistics. And Basu said he expects contractors will continue hiring and raising wages as baby boomers retire from skilled trades.

“Even if we enter recession, even if construction activity slows down, my strong sense is you’re going to be paying more for work,” he said.

Material prices also remained elevated, with inputs to construction up 16.3% year-over-year in September, according to the U.S. Bureau of Labor Statistics. Basu noted that was down from closer to 25% within the past year.

Even with the increased costs and builders operating at capacity, Basu said investment in nonresidential buildings is down, pointing to data from the U.S. Bureau of Economic Analysis. Contractors have largely been able to pass along costs to owners. Basu said that may not be the case in the coming months. As bid amounts continue rising, private owners will balk, and public owners will worry about spending taxpayer money even as legislation like the Infrastructure Investment and Jobs Act has helped fuel construction spending in areas like water supply for lead pipe replacement.

Sectors like manufacturing and commercial have also seen large increases in construction spending since the start of 2020 pandemic shutdowns, but total nonresidential construction spending was still down by 2.9% in August compared to pre-pandemic levels, according to U.S. Census Bureau data. Yet contractors are still looking to hire.

“That gives us a sense of how truncated supply capacity has become in the nonresidential construction segment because of equipment shortages, because of a lack of skilled workers,” Basu said.

Explaining his expectation for a recession, Basu said he expects the economy will remain unbalanced with continuing inflation and rising interest rates, plus supply lagging behind demand amid Russia’s invasion of Ukraine, Chinese COVID-19 policy and Europe’s energy crisis.

Building sectors that Basu expects to hold up the best during a recession include public construction, healthcare, data centers and multifamily.