In 2023, the U.S. economy defied recessionary expectations with strong growth despite high inflation and resulting rising interest rates. The latest Conference Board projection is 2.4% growth, driven by strong consumer spending, surging investment in manufacturing construction, and increased state and local government spending.
After peaking in the summer of 2022, inflation has been steadily cooling while unemployment remained low, largely due to recovering supply chains. As inflation cooled, real wages grew. Consumer sentiment showed momentum in recovering. The Conference Board forecasts the U.S. economy will slow to 0.9% growth in 2024, after which it will normalize and potentially increase to 1.7% in 2025.
A major contributor to the economy is construction, which overall exhibited unusually strong growth in 2023 after a solid rebound in 2022 following 2021’s pandemic-related contraction. While about a third of this was new manufacturing investment, various nonresidential segments also did very well during the year.
The boom is expected to abate in 2024, however—still growing but at a significantly slower pace, according to the American Institute of Architects (AIA) Construction Consensus Forecast Panel made up of leading economic forecasters. The Panel forecasted that nonresidential construction spending will slow to 4% growth in 2024 and further slow to 1% growth in 2025.
According to the AIA, despite strong spending across virtually all markets in the latter half of 2023, the construction slowdown may already be underway, as construction starts either slowed or turned negative in these markets.
2023 Construction Spending
According to the U.S. Commerce Department, U.S. put-in-place construction spending grew to a seasonally adjusted annual rate of $2.05 trillion as of November 2022, the latest month for which data was available at the time of writing. Year over year, total spending increased 11.3%.
Through November 2023, actual construction spending amounted to $1.8 billion, 6.2% above the $1.7 billion for the same period the previous year.
Private nonresidential construction spending achieved a seasonally adjusted annual rate of $698.2 billion in November 2023. Private residential construction spending achieved a seasonally adjusted annual rate of $896.8 billion. Public construction spending achieved a seasonally adjusted annual rate of $455.1 billion.
The overall seasonally adjusted rate of nonresidential construction spending in 2023 showed an 18.1% increase year over year in November 2023. Driven by government policies such as the IIJA, IRA, and CHIPS legislation, U.S. manufacturing construction spending dramatically surged with a 59.1% increase in 2023. Additional markets showing strong growth included education (+16.7%), healthcare (+11.7%), religious (+31.1%), and others.
The AIA identified several significant headwinds affecting growth, notably regarding commercial buildings. These include tighter credit resulting from rising long-term interesting rates, increasing stress on projects; construction commodity cost inflation, currently stabilized but with cost inputs still 35-40% higher than before the pandemic, and with labor costs still rising; declining nonresidential property values led by office and retail; and lower demand for certain types of buildings due to the shift to remote work and the pandemic boosting e-commerce.
Dodge Construction Network
Issued by Dodge Construction Network, the Dodge Momentum Index (DMI) rose to a score of 186.6 in December 2023 from 181.5 in November, a 3% increase. Over the month, commercial planning grew 1% and institutional planning improved 6.1%.
“The Momentum Index ended the year 11% below the November 2022 peak, ultimately stabilizing as the year progressed,” said Sarah Martin, associate director of forecasting for Dodge Construction Network. “Regardless, the DMI averaged a reading of 184.3 in 2023, hitting levels of activity that haven’t been recorded since 2008.”
She added, “While ongoing labor and construction cost issues will persist in 2024, a substantive amount of projects are sitting in the planning queue and will support construction spending going into 2025.”
Hotel and data center planning drove growth in the commercial segment of the DMI over the month of December, while stronger healthcare and public building planning supported more momentum on the institutional side.
Year over year, the DMI was 2% lower than in December 2022. The commercial segment was down 9% from year-ago levels, while the institutional segment was up 14% over the same time period.
Architecture Billings Index
The AIA/Deltek Architecture Billings Index (ABI) is a leading economic indicator of construction activity, providing an approximately nine- to 12-month view into the future of nonresidential construction spending activity. The score is derived from a monthly survey of architecture firms that measures the change in the number of services provided to clients. A score above 50 indicates expansionary business conditions.
As of November 2023, the ABI remained below 50 for the fourth consecutive month, as it did during seven out of the first 11 months of the year. The score of 45.3 increased by one point from October, indicating slightly fewer firms reporting a decline in billings.
“This marks the seventh month in 2023 with a decline in billings,” said Kermit Baker, PhD, AIA Chief Economist. “Over the past three months, this pace of decline has accelerated, with firms in all specializations and in all regions of the country reporting weakening business conditions.”
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He added, “However, with signs that credit conditions are beginning to ease, firms are reporting an uptick in inquiries for future projects.”
Firms in all regions reported a decline in billings, with business conditions remaining softest at firms located in the West as the region’s billings hit a low for the year. Firms specializing in multi-family residential continue to remain the weakest and business conditions declined further at firms with institutional specialization, despite being the strongest to start 2023.
Electrical industry confidence
Electrical industry business confidence proved neutral or negative for much of the year but ended 2023 on a positive note—a three-month run of positive confidence.
In December 2023, the current conditions component of the National Electrical Manufacturers Association’s (NEMA) Electroindustry Business Conditions Index (EBCI) for North America rose to 56.3, suggesting improving business conditions favorable to market expansion. This was an increase from an index score of 53.1 in November and 52.8 in October, which was the first time the EBCI returned to expansionary territory since February.
Nearly one-third of survey respondents reported “better” conditions during the month, with 50% calling the situation unchanged. Respondents were largely positive in their comments, while noting slowing or stalled order activity and geopolitical concerns.
The future conditions component of the index, meanwhile, proved even more upbeat, surging in December 2023 to its highest score since the spring of 2021. The December score was 81.3, a significant increase from November’s already strong 68.8, with 75% of responding panelists anticipating “better” conditions in six months.
General Contractors
Construction contractors have a decidedly mixed outlook for 2024 as firms predict transitions in demand for projects, according to A Construction Market in Transition: The 2024 Construction Hiring and Business Outlook, a report based on a survey by the Associated General Contractors of America.
“2024 offers a mixed bag for construction contractors: on one hand, demand for many types of projects should continue to expand and firms will continue to invest in the tools they need to be more efficient,” said Stephen E. Sandherr, AGC’s CEO. “Meanwhile, they face significant challenges when it comes to finding workers, coping with rising costs, and weathering the impacts of higher interest rates.”
The net survey reading—the percentage of respondents who expect the available dollar value of projects to expand compared to the percentage who expect it to shrink—was positive for 14 of the 17 categories of construction included in the survey, as it was in 2023.
However, a smaller share than before expects the markets they compete in to expand in the coming year. The net reading decreased from the 2023 survey for nine project types, increased for six types, and remained unchanged for two.
Among private sector markets, the highest expectations are for power projects, hospitals, and non-hospital healthcare facilities such as clinics. The largest increase in optimism from the previous survey is for data center construction, while contractors are also quite optimistic about the education market. Contractors are bearish, however, for lodging, retail, and private office construction.
“On balance, contractors remain upbeat about the available dollar value of projects to bid on in 2024,” said Ken Simonson, AGC’s chief economist. But the optimism regarding opportunities for most project types is less widespread than it was a year ago.” He noted 69% of respondents expect to hire in 2024.
Amid these changes, contractors are struggling to cope with significant labor shortages, the impacts of higher interest rates and input costs, and a supply chain that, while better, is still far from normal, according to the survey.
AIA Consensus Forecast for 2024
After an extraordinarily strong nonresidential construction market in 2023, the industry will see weaker conditions in 2024 and 2025, according to the AIA Consensus Construction Forecast. Spending on nonresidential buildings is expected to increase at a far more modest 4% in 2024 and slow further to a little over 1% growth in 2025.
Spending on commercial facilities will be flat this year and next, manufacturing construction will increase significantly in 2024 before stabilizing in 2025, and institutional construction will enjoy mid-single-digit gains in both years.
