As there is a natural amount of uncertainty lingering over the construction sector, it is very essential for the E&C firms to make sure that proper measures are taken so as to address the downturn related to the economy.
Post a year of surging interest rates as well as high inflation, there has been more segmentation in the market ever since last year’s E&C sector outlook. The construction industry is all set to face the lingering effects when it comes to economic uncertainty for another year. The federal funds interest rate went on to record a 22-year high in September this year at 5.3%, a 108% YoY increase. 1 Moreover, the consumer price index, when it comes to entire urban consumers in US cities, surged by 4% YoY in August 2023. 2 More tightening when it comes to monetary policy by the Fed could trigger the challenges of an economic downturn, even if inflation cools. 3
It is well to be noted that broader economics, monetary policy, as well as overall market uncertainty have had different impacts throughout different segments. Significantly, total construction spending stood at US$1.98 trillion in August this year, a 7.4% rise since 2022. This total spending was majorly driven by non-residential construction spending, which went on to record growth at a 17.6% YoY increase in August 2023. In contrast, residential construction spending dipped by 3% for the same period, thereby highlighting the overall weakness when it comes to the housing market. 4
In the case of the residential segment, the housing market performance in 2024 goes on to depend on broader economics. From January to August this year, overall housing beginnings decreased by 13% vis-à-vis the same period in 2022, mostly because of a rise in interest rates as well as inflation. 5 According to Bureau of Labor Statistics data, housing inflation in US cities rose to 5.7% year over year in August 2023 and was a significant contributor to the increase in core consumer price inflation. Given the vertical sensitivity when it comes to the economic cycles, ongoing high interest rates as well as mortgage rates will most probably affect housing affordability, dip demand, and restrain the segment’s functioning. It is well worth noting that Deloitte’s US Economic Forecast forecasts just a slight growth in housing construction over the next year. 6
Significantly, the non-residential segment is most likely to continue to grow in a steady way as federal funds flow into chip fabrication plant construction, biotech facilities, EV battery setups, and other sustainable energy projects in 2024 and as many high-value projects come into play. 7 It is well to be noted that manufacturing construction spending happened to have the largest annual rise in construction spending of 65.5% as of August this year. Manufacturing construction is, in all probability, likely to go a step further in 2024, inflated by funding of over US$52 billion from the CHIPS Act as well as almost US$152 billion from the IRA as well as IIJA. 8
Moreover, with IIJA funds getting into projects, transportation infrastructure construction spending surged 9.4% YoY in August 2023. Stepping into 2024, there could be a more important impact of IIJA funding,9 with almost US$58.8 million allocated for transportation, climate, broadband, and energy construction projects.10 Enough infrastructure fundings from state and local governments is also expected to drive growth. 11
In conclusion, the IRA has also gone on to create opportunities when it comes to the construction industry by way of tax credits along with energy incentives for the broadening of clean energy infrastructure like renewable energy generation setups and electric transmission locations, with numerous funding opportunities that are available through late 2024. 12
In spite of the flow of public funds, the uncertainty of the market is going to most likely influence numerous aspects of construction projects in the non-residential segment. Project deliveries may be deferred because of financing issues as well as disruptions throughout the supply chain. Margins could reduce as the cost of materials along with labor fluctuates as against economic uncertainty. Financing could go on to become more expensive as interest rates dwindle and affect the feasibility of certain projects. And finally, the backlogs in the segment, which can help E&C firms go on to sustain operations by way of economic uncertainties, may as well be reduced if ambiguous timelines and financing of new projects go on to be there in the coming year. As of August this year, backlogs when it comes to the non-residential segment had surged to 9.2 months13 and are all set to sustain the segment going into 2024.
As organizations go on to decide on the needed next steps so as to navigate uncertain economic times, the sector may very well experience an increase when it comes to mergers and acquisition activity. Between October 2022 as well as September 2023, the sector went on to record 184 M&A deals, with an estimated value of accomplished deals at US$3.7 billion. 14 Many of such deals are likely targeted at strategic expansion into new markets so as to make access to the additional revenue streams better or at horizontal integration so as to help achieve cost efficiency as well as enhance resilience to market fluctuations. The sector also went on to record 84 M&A deals from private equity investors, having a total deal value of US$4.5 billion. 15 M&A activity when it comes to private equity investors may see a rise as they continue with the funding in infrastructure assets as well as capital projects.
E&C companies will most likely require strategic decisions that are based on their capabilities so as to overcome ambiguities throughout the market. Some construction companies may opt to focus on their core business, deepening their skills and also averting risk. On the other hand, some may opt to reinvent or expand by making investments in business transformation that are targeted and/or new M&A activity so as to reap greater rewards when the market regains the balance.
REFERENCES
1. Deloitte analysis of data from Federal Reserve Bank of St. Louis.
View in Article – https://www2.deloitte.com/us/en/insights/industry/engineering-and-construction/engineering-and-construction-industry-outlook.html#endnote-sup-26
2. Deloitte analysis of data from U.S. Bureau of Labor Statistics.
View in Article – https://www2.deloitte.com/us/en/insights/industry/engineering-and-construction/engineering-and-construction-industry-outlook.html#endnote-sup-27
3. Daniel Bachman, United States Economic Forecast – https://www2.deloitte.com/us/en/insights/economy/us-economic-forecast/united-states-outlook-analysis.html, Deloitte Insights, September 2023.
View in Article – https://www2.deloitte.com/us/en/insights/industry/engineering-and-construction/engineering-and-construction-industry-outlook.html#endnote-sup-28
4. Deloitte analysis of data from U.S. Census Bureau.
View in Article – https://www2.deloitte.com/us/en/insights/industry/engineering-and-construction/engineering-and-construction-industry-outlook.html#endnote-sup-29
5. Ibid.
View in Article – https://www2.deloitte.com/us/en/insights/industry/engineering-and-construction/engineering-and-construction-industry-outlook.html#endnote-sup-30
6. Bachman, United States Economic Forecast – https://www2.deloitte.com/us/en/insights/economy/us-economic-forecast/united-states-outlook-analysis.html.
View in Article – https://www2.deloitte.com/us/en/insights/industry/engineering-and-construction/engineering-and-construction-industry-outlook.html#endnote-sup-31
7. Sebastian Obando and Julia Himmel, “Construction’s manufacturing boom: Mapping the biggest facilities underway in the US, – https://www.constructiondive.com/news/manufacturing-construction-boom-tracker-map/688140/” Construction Dive, August 7, 2023.
View in Article – https://www2.deloitte.com/us/en/insights/industry/engineering-and-construction/engineering-and-construction-industry-outlook.html#endnote-sup-32
8. S. Department of Energy, “Building America’s clean energy future, – https://www.energy.gov/invest” accessed October 6, 2023.
View in Article – https://www2.deloitte.com/us/en/insights/industry/engineering-and-construction/engineering-and-construction-industry-outlook.html#endnote-sup-33
9. Julie Strupp, “IIJA money starting to flow to projects, – https://www.constructiondive.com/news/iija-infrastructure-act-money-start-to-flow-construction-projects/643721/” Construction Dive, February 28, 2023.
View in Article – https://www2.deloitte.com/us/en/insights/industry/engineering-and-construction/engineering-and-construction-industry-outlook.html#endnote-sup-34
10. Deloitte analysis of data from the General Services Administration.
View in Article – https://www2.deloitte.com/us/en/insights/industry/engineering-and-construction/engineering-and-construction-industry-outlook.html#endnote-sup-35
11. Strupp, “IIJA money starting to flow to projects. – https://www.constructiondive.com/news/iija-infrastructure-act-money-start-to-flow-construction-projects/643721/”
View in Article – https://www2.deloitte.com/us/en/insights/industry/engineering-and-construction/engineering-and-construction-industry-outlook.html#endnote-sup-36
12. The White House, Building a clean energy economy – https://www.whitehouse.gov/wp-content/uploads/2022/12/Inflation-Reduction-Act-Guidebook.pdf.
View in Article – https://www2.deloitte.com/us/en/insights/industry/engineering-and-construction/engineering-and-construction-industry-outlook.html#endnote-sup-37
13. Deloitte analysis of data from Associated Builders and Contractors.
View in Article – https://www2.deloitte.com/us/en/insights/industry/engineering-and-construction/engineering-and-construction-industry-outlook.html#endnote-sup-38
14. Deloitte analysis of data from Mergermarket.
View in Article – https://www2.deloitte.com/us/en/insights/industry/engineering-and-construction/engineering-and-construction-industry-outlook.html#endnote-sup-39
15. Ibid.
View in Article – https://www2.deloitte.com/us/en/insights/industry/engineering-and-construction/engineering-and-construction-industry-outlook.html#endnote-sup-40
