Easing inflation, potential rate cuts boost backlog

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Dive Brief:

  • Construction backlog moved up to 8.4 months in June, a 1.2% gain from the month prior, according to a Tuesday release from Associated Builders and Contractors. 
  • The small growth in June marks a reversal from a slight 1.2% drop in May. However, the overall backlog level remains 0.5 months below June 2023, or about a 5.6% decrease. 
  • “Backlog continues to hold up remarkably well despite high interest rates, inflation and emerging weakness in the broader economy,” said Anirban Basu, ABC chief economist. “While contractor confidence regarding the outlook for sales and staffing levels fell modestly in June, all three Construction Confidence Index components are higher than they were a year ago.”

Dive Insight:

The expectation of interest rate cuts by the Federal Reserve later this year due to easing inflation and cooling economic growth is a positive sign for construction backlog, said Basu.

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ABC’s Construction Confidence Index readings for sales and staffing levels dipped in July, while the reading for profit margins increased, according to the report. Nevertheless, all three readings remain above the threshold of 50, indicating expectations of growth over the next six months.

Backlog improved in June for all contractors with annual revenues under $100 million, according to the report. On the other hand, backlog declined for the largest contractors — those with more than $100 million in revenue — according to ABC.

The entire decline in backlog observed over the past calendar year is attributable to the middle states and Northeast regions. In contrast, the backlog in the South and West regions remained unchanged between June 2023 and June 2024, according to the report.  

“The combination of slowing inflation and softening growth suggests that the Federal Reserve may begin to lower interest rates as soon as September,” said Basu. “That will buoy backlog as some of the softer construction segments, like office and commercial, benefit from lower borrowing costs and looser lending standards.”

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