Federal Reserve report signals slowing construction demand

Dive Brief:

  • Some construction activity has begun to slow in various regions around the country as commodity pricing, building permit applications and even calls for construction workers eased, according to the latest Beige Book reading, the Federal Reserve’s informal measure of economic activity.
  • Ken Simonson, chief economist for the Associated General Contractors of America, noted several aspects reflecting lower demand for construction, including nine of the 12 Fed districts reporting “noted moderation in prices for construction inputs such as lumber and steel,” in his latest Data DIGest report. 
  • In San Francisco, commercial real estate permits and construction slowed; in Dallas, there was less demand for construction workers, according to staffing agencies; in Kansas City, financing for multifamily construction tightened, leading to fewer projects starting in recent weeks.

Dive Insight:

The report comes as contractors have started to note cooling material prices, and after four of the 11 subcategories for construction inputs in the Producer Price Index eased last month. The emerging signs of slowing demand follow three interest rate hikes this year by the Fed, which is set to meet again July 26-27, when it is expected to raise rates another 0.75 percentage points in its battle to tame historic inflation.

The latest Beige Book could provide reasons to take a softer stance, however, “as several districts reported growing signs of a slowdown in demand, and contacts in five districts noted concerns over an increased risk of a recession.” The Fed has been trying to pull off a “soft landing” of the economy by tightening monetary policy without plunging it into recession.

But there were plenty of other reasons for the Fed to continue its hawkish, rate-raising campaign, including the Consumer Price Index, which rose in June at an annual rate of 9.1%, the highest level since 1981. According to a note written after the Beige Book’s release, financial services firm UBS said, “the Fed will need much more substantial evidence that inflationary pressure is easing before they consider lifting their foot off the brake pedal.”

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