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By Ethan Duran

The Daily Reporter

With workforce woes and construction costs continuing to be the main headaches for contractors, they still have backlogs 鈥� public infrastructure in particular, according to an industry economist.

Associated Builders and Contractors chief economist Anirban Basu spoke Wednesday during a webinar for聽Construction Executive. While keeping a pulse on the overall economy and trends, he discussed current challenges, expected struggles and industry prospects.

Basu predicted the Federal Reserve聽might cut interest rates聽in September according to the bond market. The consumer price index for all items was up 3.3 percent over the past 12 months, and May 2024 construction inputs were up 2.1 percent year over year, according to federal statistics.

Basu said he was surprised by the state of the greater economy but added he thought the landing would still be rough when considering credit card debt, job openings and the Fed rate.

The construction backlog was over eight months for contractors, according to the latest ABC index. However, as interest rates start to drop, Basu said his guess is that the backlog would start to decrease in 2026 as demand softens.

Same industry problems

A survey revealed that 60 percent of responding contractors named the skills gap and worker shortages their leading challenge, according to ABC and Sage Policy Group, Basu鈥檚 firm based in Baltimore. Availability of financing followed at 17 percent and insufficient demand was at 11 percent.

There were 8.1 million job openings in the U.S. in May 2024, according to federal statistics. Employers looking for construction workers were competing with franchisees and warehouse service providers. Even with the strength of infrastructure projects, having the number of workers on the job site was still a question, Basu noted.

Construction inputs were also higher than bid prices, as inputs were 38.8 percent and bids were 36.2 percent in May 2024, according to the U.S. Bureau of Labor Statistics.

The increase of input prices outstripped the growth of bid prices, Basu said, suggesting it wouldn鈥檛 be easy to continue to support the margin. Contractors need to raise their bid prices significantly to keep up with construction costs.

Infrastructure, infrastructure, infrastructure

Nonresidential construction makes up 37 percent of spending by subsector, according to data from the U.S. Census Bureau. The biggest chunk of spending is manufacturing with 198.1 percent, followed by sewage and waste disposal at 66.8 percent and water supply at 65 percent. Due to government spending via the Infrastructure Investment and Jobs Act and the CHIPS and Science Act, the public sector was still going strong.

鈥淚t鈥檚 still the era of infrastructure,鈥� Basu said, noting that many of the recipients of CHIPS and Science Act funds were megaprojects. 鈥淭here is a lot of public spending, so sewer and water supply, health care and highway and street are all high.鈥�

Because a lot of federal money offered to health care systems during the pandemic has dried up, he noted he expected some softening in that area.

Changes in real estate demands

Meanwhile, the numbers of private developments such as multifamily or office buildings are also declining, according to the latest Architecture Billings Index 鈥� a lead indicator of projects in the pipeline. In May the index was at 42.4, which Basu said was the worst in years. The Midwest region was hit hardest at 41.7.

With the work-from-home model still popular among both employers and employees, Basu said this will continue to soften the need for office buildings. However, demolition contractors might have work ahead when banks decide offices are no longer worth maintaining, he added.

Office vacancy in the U.S. was 13.8 percent in the first quarter of 2024, according to CoStar.

One of the bright spots in the commercial construction sector will be data centers, Basu said, as the federal government unbundled the facilities from office construction. Reshoring supply chains, alternative energy and projects like electric vehicle and battery factories will still be muscular as American and foreign company owners focus on North America, he added.