Uncertainty continues to plague the construction industry, as well as the overall economy, as the first quarter comes to a close.

“The U.S. economy is at a crossroads,” says Richard Branch, chief economist at Dodge Construction Network. “The labor market is holding strong, buoying consumer spending. However, core inflation has not slowed enough, despite numerous interest rate increases from the Federal Reserve. Every additional rate increase raises the odds of a recession.”

Those odds, says Branch, remain “uncomfortably high,” further complicated by the recent banking issues. “Overall, the U.S. banking system is healthy, but smaller regional banks could face difficulty, and many have begun to tighten lending standards,” says Branch. “These smaller banks are the lifeblood of the construction sector—providing credit not just to contractors, but also loans to developers for many types of projects.” He adds: “Should credit continue to tighten, it could put many small players in the construction sector in difficult situations and potentially lead to a sharper pullback in construction starts.”

Julian Anderson, president of Rider Levett Bucknall, agrees that banking issues could lead to future problems. “I expect that the smaller banks will suffer [due to declining confidence in them] and that will have a negative impact on some construction lending,” he says. “I also suspect that while the [Biden] administration’s recent actions helped to avert an immediate catastrophe, there will be long term consequences, which may or may not be positive.”

Anderson notes that prior to these events, he did not believe a recession was likely to occur this year. “The construction industry was steaming along and it was hard to see anything near term that would cause it to tip into recession in 2023. So, while I thought that a recession was still possible, I felt that the risk was less,” he says. “A potential banking crisis has changed that.”

In the residential sector, single-family starts grew in February for the first time in 13 months, according the Dodge Construction Network. “While one month does not a trend make, when combined with an increase in existing home sales, it could mean the bottom of the single family market is near,” says Branch. After a prolonged period of growth, multifamily starts, however, have begun to decline, down 16% through January and February.

In the first two months of the year, non-residential starts were down 14%, according to Dodge. Branch points to office, manufacturing and education work as “bright spots” in an otherwise slow start for the sector in 2023. On the infrastructure side, starts are up 10% in the same time period, which Branch attributes to public works such as water and sewer construction.

Overall in 2023, Branch expects increased public spending due to CHIPS, IRA and IIJA to help the construction industry “weather the storm” that could be on the horizon. However, he warns, this could create a “bifurcated market—the ‘haves’ and the ‘have-nots’. Areas of the country where large manufacturing and infrastructure projects are happening should be solid in 2023. However, those areas that rely on small and medium-sized building projects could feel enhanced pain as the year progresses,” he adds.

Lumber Prices Fall

“Softwood lumber prices appear to be very close to the bottom of their downward trajectory from the highs over the past two years. The general [quarterly] price trend for 2023 will be flat with any temporary price declines rebounding, and any price spikes receding,” says Luke Lillehaugen, senior economist at S&P Global. “Going forward, prices will not return to pre-COVID levels as input costs—most notably labor costs—have increased throughout the pandemic.”

However, looking year-over-year, S&P Global expects softwood lumber to decline 28.9% in 2023. “While the quarterly pattern of softwood lumber prices in 2023 is fairly stable, the major price decreases in the second half of 2022 mean that the average annual prices in 2023 will be far lower than they were the previous year, despite only minimal movements between quarters,” says Lillehaugen.

Plywood prices are also expected to decline in 2023, at a rate of 18.4%, according to S&P Global.