The Federal Reserve’s rate hikes began to temper inflation in 2022’s fourth quarter, but the economy continues to put up strong numbers due to tightness in the labor market. Discipline is the key word heading into 2023—discipline to hold rising interest rates to assure inflation is halted. In this issue, we dive into the national strategy our mission critical team is employing to deal with resource challenges across the country. We also examine how consumer spending, the housing market, and the steep increase in grocery prices are impacting the economy, particularly construction.
In this Spotlight, Brian Pung, Preconstruction Director for JE Dunn’s mission critical team, explains what makes data centers unique, the trends steering the industry, and what we are doing to remain flexible to adapt to the known and unknown challenges on the horizon.
“We have found that by applying national strategies and sharing resources instead of just looking at each individual project’s potential hurdles, we’ve helped all our teams across the U.S. meet the demands of these fast-paced mega projects and scaling requirements of the owners.”
Since we launched The Look Ahead in 1Q2022, we have received valuable feedback and a lot of questions about the future of our economy. As our internal teams keep close tabs on economic fluctuations, material pricing, and the national supply chain, we wanted to offer some thoughts on the direction we think our economy could go in 2023.
We believe the Federal Reserve will raise the Federal Funds rate .25% in February and at least another .25% at the end of March. Members of the FOMC have indicated that the terminal Federal Funds rate will still not have been reached with those two hikes. If that proves to be the case, then the economy won’t reach a sufficiently suppressive state to drive inflation down fast enough, and up to another .50% in hikes will be required. This would leave the rest of 2023 between 5.25% and 5.50%.
Given those operations, we see real Gross Domestic Product (GDP) growth staying in positive territory for 4Q22 but falling into negative growth for the first half of 2023. It may cross back into the positive by the second half of the year.
Consumer spending will likely stay elevated for the first part of 2023 and will be what keeps inflation from coming down at the pace we need. With heightened spending, the labor market stays tighter for longer, sustaining inflation. Once the lag from Fed hikes finally works through the system, and consumers run out of cash, spending will fall and wage growth will slow—especially on the services side. The labor market would likely then loosen, and unemployment could rise somewhere in excess of 5%, though not likely above 6%. This will cause inflation to subside and come within sight of the Fed’s target rate of 2%. We don’t think reaching 2% this year is possible, but we should get below 4%, which would be a welcome change.
For construction, we see the effects of the slowdown as planned jobs reduce due to higher interest rates and lower spending in general. We expect costs to moderate as well but not enough to fully prop demand back up. Most of the effects on construction should come in the back half of the year. Overall, we anticipate the impact will be milder than the last two recessions (Pandemic & Great Recession), and the industry will likely enter back into the expansionary portion of the cycle sometime in late 2024.
Additionally, here are some predictions for specific construction markets. Demand for new retail will be negatively impacted by a decline in spending. New housing supply (single and multi-family) will see some relief with the pandemic backlog and will impact rent and vacancy by driving down rates as more units become available. While bringing workers back into the office boosts that demand, loosening the labor market will mean less workers on payroll and fewer cubicles needed. Chip manufacturing is seeing some cooling for the most cutting-edge products, but older tech is still in high demand. We foresee some of that demand waning by the end of 2023 thanks to a pullback in consumer spending. Hospitals and schools are typically not directly impacted by retail spending and will therefore be more resilient to the effects of a cooling economy.
