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Builder confidence in securing new work also jumped, fueled by the expectation of rate cuts.
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- Construction backlog ticked up in December to 8.6 months due to improving financing availability, according to a Tuesday release from Associated Builders and Contractors.
- The metric is still rebounding from a backlog level of 8.4 months in October, its lowest point since the first quarter of 2022, according to ABC. The December increase, however, has sparked some confidence among contractors, due to two consecutive months now of backlog growth.
- “Collectively, contractors experienced an uptick in optimism during the holiday season,” said Anirban Basu, ABC chief economist, in the report. “Credit conditions eased a bit during the last days of 2023 as the Federal Reserve indicated that its next set of moves will be to reduce borrowing costs.”
The Federal Reserve will likely trim the federal funds rate by the end of 2024, according to Fed officials. That anticipated easing of credit conditions resulted in both an improved backlog and more optimism in ABC’s Construction Confidence Index for the first half of 2024.
All three components of the index, which consists of sales, employment and profit margins, increased in December. Additionally, all three readings remain above the threshold of 50, indicating expectations for growth over the next six months, according to the report.
But causes for concern persist, especially since the Fed noted inflation still remained elevated during its last meeting in December. That could cause rates to remain up in the interim, said Basu.
“Recent data indicate that wage pressures persist, which makes it more likely that interest rates, and therefore project financing costs, will remain higher for longer,” said Basu. “Geopolitical instability appears to be on the rise, raising the probability of a major conflagration that could further impact supply chains and potentially cause steep increases in certain energy prices.”
That poses a challenge for contractors, especially for smaller firms with less than $30 million in revenue that focus on private-led construction, according to the report. Firms with under $30 million in revenue reported a decrease in backlog in December, dropping about 0.3 months worth of work.
The South, which remains the region with the lengthiest backlog, posted the largest monthly increase in December. Only the West, which historically reports the lowest backlog of any region, experienced a monthly decline, according to the report.