Confidence is booming in the construction and real estate industries, an anomaly in 2023 compared to other industries.
“Small-business America is not optimistic,” explained Anirban Basu, Ph.D., an economist and chairman & CEO of Sage Policy Group. Few believe now is a good time to expand their businesses, said Basu, mirroring beliefs from 2008 and 2009.
Inversely, American contractors have a backlog of projects — and in a six-month time frame are expecting to expand their workforce, increase sales and see a rise in their profit margins.
“[Contractors] have a visibility that many other business operators don’t have,” said Basu, a keynote speaker at the 2023 AICPA® & CIMA® Construction & Real Estate Conference, Dec. 4–6. “When you’re talking about equipment shortages, higher equipment prices, price inflation and a lack of workers … one might think, given high interest rates, margins would become smaller.”
But that hasn’t been the case — according to Basu, contractors have enough pricing power to push margins higher.
“This tells us about the strength of the U.S. economy, in particular the strength of the construction industry,” Basu said.
But this strength may be short-lived. In the video “Economic outlook with Dr. Anirban Basu, J.D., Ph.D.,chairman and CEO, Sage Policy Group, Inc.,” Basu discussed which economic drivers are helping him forecast the future of the construction and real estate industries and of the U.S. economy.
Economic drivers to watch
Of the various economic drivers Basu is keeping tabs on, two are the rate of workers entering the construction industry, and geopolitics.
Contractors, realtors and others in their respective industries are leaving the workforce because of retirement, current housing supply or other reasons — and the open positions that result are going unfilled. Fewer workers are going into these industries, particularly construction, because of lack of awareness, changing cultural attitudes and the emphasis on four-year college degrees, said Basu.
“A lot of young people are not aware that the skills trades offer a pathway to prosperity,” said Basu.
Geopolitical factors are affecting overall global economic outlooks, and their impact will reach the construction and real estate industries. There are anticipated price fluctuations for fuel, wheat, cooking oil and fertilizer because of current global conflicts. And while some economic experts are bracing for steep increases, currently, there seems to be minimal impact on the U.S. economy.
“Oil prices are neatly below $90 per barrel … the consumer is still spending, and employers are adding jobs,” said Basu. “While the outlooks have dimmed because of these conflicts, the economy is performing quite well.”
Strong momentum could shift to uncertainty
High inflation and interest rates have not slowed the economy. The supply chain has stabilized and improved contributing to good economic performance. And consumers are still spending on big-ticket items like pricey concert tickets or new cars.
However, the economy is likely to slow down.
“There’s an inverted-yield curve. That means that short-term interest rates are higher than long-term bond interest rates,” explained Basu. This curve was present before other recessions in the last 50 years. “Now we have massive inversion in the yield curve, and it’s been a nearly flawless predictor of recessions for decades. I think a recession is coming.
“2023 has been shockingly strong for the U.S. economy and right now we are poised to enter 2024 with a lot of momentum,” said Basu, but that recession could still be right around the corner. “The war on excess inflation is not yet done. That’s one of the reasons the economic momentum we’re currently experiencing — and there’s a lot of momentum — is still jeopardized. That will show up in the next 12 months.”
Whether the construction and real estate industries continue with their strength and confidence or the U.S. slips into a recession, accounting and finance professionals need accurate economic insights to better assist their clients in their respective industries.
Watch the full video with Basu to learn his overall outlook and what factors are affecting the construction and real estate industries.
At the 2023 AICPA & CIMA Construction & Real Estate Conference, you can hear directly from Basu on the construction and real estate business cycle, higher interest rates, materials costs, the labor market, office vacancies and other factors swaying the two industries. The three-day conference kicks off Monday, Dec. 4, at Caesars Palace in Las Vegas and connects you to industry experts, emerging trends and the relevant data you and your clients need. On-site and livestream options are available. Register today.