Here We Go Again
June 2024
Construction financial professionals could be accused of suffering from a touch of whatever afflicted Dr. Jekyll and Mr. Hyde. In recent years, they have often greeted the New Year with optimism, only to have that optimism regarding construction industry fortunes dissipate as winter turned toward spring and then summer.
The latest CONFINDEX survey results indicate that 2024 may prove no different. During 2024’s initial quarter, all five indices rose, including the Overall CONFINDEX. During the second quarter, four of five dipped. This is not to suggest, however, that CFOs and other financial professionals anticipate something catastrophic. Four of five indices remain above year-ago levels.
The Overall reading declined nearly 3% during the second quarter from a first quarter reading of 109 to settle in at 106. The second quarter reading is 5% above its year-ago level of 101. A year ago, there were many industry participants, economists, and others who thought recession was inevitable. After all, 2022 was a terrible year for U.S. equity markets and interest rates raced higher that year. These were thought to be precursors of an overall economic downturn that would eventually result in lost construction spending momentum.
Instead, the economy rallied, expanding 2.5% last year. Many construction segments continued to experience substantial growth in spending despite elevated borrowing costs and tumult impacting the U.S. banking sector in March 2023. The unexpected construction spending momentum apparent in 2023 helped explain the enthusiastic responses registered by the CONFINDEX survey at the start of 2024.
But something has changed more recently. The godfather of monetary theory, Milton Friedman, noted that monetary policy operates with long and variable lags. It was a bit more than two years ago that the Federal Reserve began raising interest rates. A combination of theory and observation suggest that it is after such a period that higher interest rates begin to take their greatest toll on economic momentum.
Perhaps that explains why over the past quarter the percentage of respondents who express a significant level of concern regarding demand for construction services increased from 13% to 23%. It may also explain why the proportion concerned by the availability of financing for projects expanded from 24% to 31%. At the same time, the percentage of respondents indicating that finding enough skilled workers was cause for substantial concern fell from 71% to 64%. These factors all suggest softening demand for construction services.
Much of this was captured by the Business Conditions Index, which declined roughly 4% during the second quarter from 109 to 105. The Financial Conditions Index also slipped, albeit marginally from a reading of 109 to 108. The upshot is that despite massive infusions of capital from the federal government, growing challenges pertaining to raising private capital more than offset Washington’s largesse.