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Dive brief:
- The construction backlog increased in December to 8.6 months due to improved financing availability, according to a statement Tuesday from Associated Builders and Contractors.
- The metric is still recovering from an 8.4-month portfolio level in October, its lowest point since the first quarter of 2022, according to ABC. December’s increase, however, has sparked some confidence among contractors, due to two consecutive months of backlog growth.
- “Collectively, contractors experienced an uptick in optimism during the holiday season,” Anirban Basu, ABC’s chief economist, said in the report. “Credit conditions eased somewhat in the final days of 2023 as the Federal Reserve signaled that its next set of moves will be to lower borrowing costs.”
Diving knowledge:
The Federal Reserve will likely cut the federal funds rate by the end of 2024, according to Fed officials. This early easing of credit conditions led to an improvement in the backlog and more optimism in ABC’s construction confidence index for the first half of 2024.
All three components of the index, which consists of sales, employment and profit margins, rose in December. In addition, all three readings remain above the 50 threshold, indicating expectations for growth over the next six months, the report said.
But reasons for concern persist, especially as the Fed noted that inflation still remained elevated at its last meeting in December. That could keep rates on the rise, Basu said.
“Recent data indicates that wage pressures persist, making it more likely that interest rates, and therefore project finance costs, will remain higher for longer,” Basu said. “Geopolitical instability appears to be on the rise, increasing the likelihood of a major conflagration that could further affect supply chains and potentially lead to sharp increases in certain energy prices.”
According to the report, this poses a challenge for contractors, especially smaller companies with less than $30 million in revenue that focus on private construction. Businesses with less than $30 million in revenue reported a decline in the backlog of work in December, with a decrease of about 0.3 months of work..
The South, which remains the lagging region, posted the largest monthly increase in December. According to the report, only the West, which historically has the lowest lag of any region, experienced a monthly decline.
