Ninth District’s struggling construction industry shows some improvement

The Ninth District’s construction industry continues to struggle, with many firms reporting less demand from customers and higher construction costs, according to the Minneapolis Fed’s spring survey.

“We have seen a significant decline in commercial projects being scheduled. It’s been more of repairs rather than full blown new construction or remodeling,” a sheet metal contractor in northeast Minnesota said.

Firms that reported worsening revenues year over year outnumbered those reporting improving revenues. Many also reported significantly higher labor and material costs—exceeding 5 percent—that dampened their profits.

But the industry appears to be in a better place this year. The share of firms reporting worsening revenues fell since the spring 2023 survey, as did the share reporting significantly higher costs.

The Minneapolis Fed and its partners conducted the survey throughout the second half of April, receiving nearly 300 responses.

Financial conditions still difficult for many

Profit and revenue tell slightly different stories about how well the construction industry did in recent months. Revenue may be seen as a measure of the level of business activity in the industry, and profit a measure of financial health.

Firms reporting worsening revenues and profits still outnumbered those reporting improving financial conditions (Figure 1). But the share of firms reporting stable conditions grew the most from a year ago, especially those reporting stable profits. The share reporting growing profits changed little.

The responses reflect continued weak demand and high construction costs, and the inability of firms to pass those cost increases on to clients. Among firms reporting growing revenues, 41 percent reported flat or shrinking profits.

Financial health varied widely depending on the sector firms work in and the type of work they perform.

Firms in the commercial and infrastructure sectors were more likely to report improving financial conditions. This was also the case with firms providing professional services, such as architecture and engineering, along with mechanical, electrical, and plumbing contractors. Firms in the residential sector, general contractors, and contractors in miscellaneous trades (such as flooring or roofing) were more likely to report worsening conditions.

Many survey respondents said interest rates continued to hurt demand.

One Twin Cities general contractor involved in residential construction said high rates made it challenging for developers to raise capital and that many were canceling projects or turning to less common financing sources. “Our company has been asked more than once to become an investor in the project, or defer our fee, or provide short-term loans.”

In south-central Montana, a homebuilder said uncertainty surrounding rate changes contributed to her firm’s worsening profits. The firm builds both built-to-order and speculative homes, which are homes built for the market. Demand for built-to-order homes is low because interest rates may change between the time a home is ordered and the time it’s completed, when full payment is expected. Demand for spec homes remains high despite high rates because of low inventory in the area. But the builder said her firm cannot afford to finance many spec homes, at least not enough to keep everyone employed as before.

Costs of construction stabilizing

When survey respondents were asked about challenges other than customer demand, the top problems were labor availability, rising costs of construction materials, and higher interest rates. The first two in particular have made construction more costly for builders.

A third of firms said hiring was very difficult. That’s high, but not as high as a year ago when 57 percent reported the same difficulty. In spring 2022, 64 percent said hiring was very difficult.

As hiring has become less difficult, significant wage increases have become less common (Figure 2). In the recent survey, 23 percent of firms reported increasing wages for skilled trades by more than 5 percent year over year. Seventeen percent reported the same wage increases for other jobs. A year ago, about a third of firms reported such increases for both categories.

These wage increases were more common in Greater Minnesota, northern Wisconsin, and Michigan’s Upper Peninsula, as well as in the infrastructure sector.

Competition for workers is responsible for some of the higher wages, according to a Twin Cities engineering firm involved in infrastructure construction. “It looks like a merry-go-round in stealing staff and losing staff,” the respondent said. “Head count remains neutral, but we are paying higher salaries to the replacements.”

Construction material became more expensive for many firms, with 17 percent reporting prices rising by 10 percent or more. But, like wages, this is an improvement. In spring 2023, 30 percent of firms reported the same price increase, and the year before it was 76 percent.

Price increases were relatively uniform across different sectors and different types of work. However, there were differences between the Twin Cities—where fewer firms reported significant price increases—and the rest of the district.

A Twin Cities plumbing supplier said manufacturers appear to be returning to the “standard once-a-year 3 to 5 percent increase.” Most have halted the pandemic-era practice of twice-a-year price hikes, he said.

What the months ahead may bring

Despite significant changes in business conditions in the past several years, surveys have found little change in the construction industry’s outlook. Since the spring 2021 survey, about half of respondents have said they were optimistic about the next several months and a quarter have said they were pessimistic.

But, when asked about profits, a growing share of firms do expect better days ahead.

For example, firms expecting improving profits outnumbered both those expecting flat profits and those expecting worsening profits. That’s a shift from a year ago, when the largest group was those expecting profits to worsen.

The brighter picture may be a reflection of the work available to construction firms. While the share of firms reporting fewer bid opportunities still outnumbered those reporting more opportunities, the gap has narrowed compared with a year ago. The same was true for firms reporting a growing backlog of projects.

“Since there has been so much bidding activity, we have been selective in jobs that we are quoting on,” an electrical contractor in central South Dakota reported. “We have a full work schedule until June of 2025.”