The Associated Builders and Contractors reported that its Construction Backlog Indicator dropped by 0.2 months in July and currently stands at 8.7 months overall. While this figure is lower than its peak 0.3 drop in May, it is still a higher climb than at any point between March 2020 and March 2022. Backlog also decreased by 1.2 months for contractors with less than $30 million in revenue.
There are a multitude of reasons for the drop in industry backlog, but some notable causes include:
- Fewer bidding opportunities
- More competition for work
- Rising material costs
- Tighter lending standards
- Weakened commercial real estate fundamentals
- Higher borrowing costs
These statistics show that the level of construction has begun to fade. The average contractor still expects employment and sales to climb over the next six months; however, the current pace of expansion is set to be slow.
Higher borrowing costs, weak commercial real estate fundamentals, and the reluctance of many project owners to bear the full brunt of higher construction materials prices and rising compensation costs are pushing profit margins lower. We expect to see margins shrink over the next six months.
While it is critical to prepare for more challenging times ahead, the construction industry has proven to be resilient and cyclical. It may be too soon to conclude that nonresidential construction has entered a recession.
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