2023 Construction Outlook

The construction industry saw positive backlogs offset by challenging headwinds in 2022. Most construction economists see similar mixed signals for the 2023 construction outlook.

Inflation climbed to a 40 year high in June, fueled by pandemic induced supply chain disruptions and worsening geopolitical events. The resulting spike in commodity prices caused across the board cost increases for most construction materials. Total costs were further strained by a historically tight labor market, driving up wages and on-boarding costs to all time highs.

On the positive side, construction backlogs remained elevated for most of the year, allowing the industry to digest most of these cost increases.

For 2023, we looked at five key indicators and what they suggest in the year ahead.

Architecture Billings’ Positive Streak Ends

AIA future construction spending index
AIA: Architecture Billing Index

The American Institute of Architects tracks future nonresidential construction spending 9 – 12 months out in their Architecture Billing Index (ABI). Anything over 50 indicates an increase in total billings. For all of 2022, the ABI was been positive. Unfortunately, the index took a sharp downward turn in October. Architects being busy, means contractors will be busy, so this decline could be an indication that a slow down is coming in the later half of 2023. The lag in the industry, however, likely means that construction should stay strong through 2023, regardless of the economic conditions.

The more problematic years could potentially be 2024 or 2025.

Construction backlog remains steady

The Associated Builders and Contractors (ABC) survey their members monthly to measure the backlog volume for future months.

months of construction backlog
ABC: months of backlog

Nothing inspires confidence in the construction industry more than backlog. The start of 2022 saw a sharp increase in backlogs, but then began declining in June. Although it ticked back up in September, it dipped once again in October. Regardless, total backlogs are still significantly higher than the year-ago period.

Commercial and institutional backlogs have been hit the hardest, posting their largest monthly decline in October since July of 2020. Conversely, infrastructure and heavy industrial projects continue to show positive growth. These sectors will likely remain elevated in the coming years due to the steady flow of federal funds. Another bright spot appears to be the manufacturing sector, where there is a significant increase in investment for semiconductors, electric vehicles, batteries, components, battery charging and alternative energy projects all funded by tax credits and other incentives in the Inflation Reduction Act.

Material price volatility

MaterialVolatilityYoY Price IndexLead Times
Flat GlassLow8.2%Increased
Copper & BrassHigh0.0%Increased

With the supply chain impacts created by the pandemic and further turmoil on the geopolitical front, inflation has surged to a 40 year high. The construction industry has been hit harder than most, and the resulting volatility makes project planning and budgeting particularly challenging. Likely, one of the most volatile commodities will be cement and cement products due to the passing of the infrastructure bill and the mere fact that the nation has not added any cement production since 2009.

Labor shortages

construction employment growth November 2021 v November 2022

It is no secret that the construction industry has struggled to attract enough workers, and that demand will only increase with upcoming federal spending. It’s possible more workers may enter the industry with long term spending providing a perception of stability. The industry may also benefit from people switching industries as the overall jobs market shows signs of weakness elsewhere.

All this labor shortage has forced wages higher, further complicating the industries upward inflation pressure. Most executives expect labor availability to remain the top challenge for contractors and foresee higher job openings and rising wages continuing into 2023.

Margin compression from increased costs

The meteoric rise of inflation has caught many contractors off-guard and severely compressed their margins due to heightened input costs. Although the spread between as bid and actual input costs will eventually be covered, the looming potential of a recession could slow the rate at which those costs are passed on. There will likely be some offset, however, as the federal spending on infrastructure and other similar projects should allow the market to maintain increased workloads despite this margin compression.