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Dive brief:
- The Minneapolis branch of the Federal Reserve has picked up on what contractors have been saying for months: Higher interest rates are strangling commercial construction deals, even as infrastructure projects grow.
- In a survey of the six-state region of the Upper Midwest, the bank found that there is a higher interest rate environment adversely affect residential and commercial constructionwhile infrastructure and industrial projects continue to thrive.
- Compared to a year ago, income fell for 61% of residential builders and 41% of commercial contractors surveyed. But only a third of infrastructure and industrial contractors saw a contraction. That kind of private market pain could bolster the case rate cuts as early as early 2024.
Diving knowledge:
The Minneapolis branch reported the survey results ahead of the Federal Open Market Committee meeting on Tuesday and Wednesday, when policymakers are largely it is expected to leave interest rates alone.
For months, contractors have been watching a bifurcated construction marketin which public funding and tax breaks fuel infrastructure and manufacturing projects, while private developments that rely on commercially financed capital have stalled or even been cancelled.
But the Minneapolis Fed survey, which polled more than 300 respondents engaged in residential, commercial, industrial and infrastructure construction, provides more insight into what builders are experiencing on the front lines, a key indicator for officials who determine monetary policy.
For example, a concrete subcontractor in the Greater Minnesota market told the bank, “There’s been a real downturn in single-family homes,” with high interest rates making homes less affordable. But the aide also said he expected more work outside of housing, because the federal and state governments are “pouring a lot of money” into public projects.
While market watchers agree the Fed will likely leave rates unchanged when it meets this week, a growing number of observers now say that if conditions continue on their current trajectory, Interest rate cuts could be coming soon like the first quarter of next year.
A case for lower rates
The Minneapolis Fed survey could provide support for doing so. It found that the residential sector began to diverge from the rest of the market around mid-2022 as interest rates rose, with the commercial sector soon following.
Infusions of government money into industrial and infrastructure projects, on the other hand, were the only thing keeping some respondents busy. For example, an architect in the Twin Cities told the bank it would likely be considering layoffs if it weren’t for government contracts, but a homebuilder in Montana said it had been completely left behind. Previously, the builder said, it would have already booked 20% of next year’s sales.
If that kind of slowdown spreads to other sectors, it could jeopardize the “soft landing” the Fed has sought in its battle to suppress inflation without sending the broader economy into a full-blown recession. Indeed, softness in commercial construction has dragged the overall planning of new projects in a more extensive report last week.
Still, other signs within the construction sector provide fodder for a prolonged period of higher interest rates. Friday the employment report was stronger than expected, as an unusually resilient labor market continues to add workers, even in the face of higher borrowing costs.
While the broader labor market added about 20,000 more jobs than expected, pushing the overall unemployment rate down from 3.9% to 3.7%, construction now added 10 times as many jobs in the last year There was 200,000 more construction jobs on Friday than at the same time in 2022.
“While construction added only 2,000 jobs for the month, the industry has added jobs at a significantly faster rate than the overall economy over the past year,” said Anirban Basu, an economist at head of Associated Builders and Contractors. “This is especially true for the non-residential sector, where employment has increased by an impressive 3.2% over the past year. This momentum is largely attributable to megaprojects in the manufacturing sector.”
