Rate Cuts Arrive as Western Michigan Construction Industry Retains Momentum

By Anirban Basu , ABC National Chief Economist

Thirty months after the Federal Reserve began raising interest rates to suppress inflation, it reduced the target range of the Federal Funds Rate by 50 basis points at its September meeting. This initial rate cut comes at a time when both inflation and the labor market are cooling. Despite the construction industry retaining some measure of momentum heading toward the end of the year, lower borrowing costs and looser lending standards will still come as a welcome development for contractors, many of whom indicate that their profit margins are under pressure due to rising material and labor costs.

Nationwide construction spending is up 4.1% over the past year and actually shrank slightly (-0.1%) in August. That’s entirely due to the residential sector, where multifamily construction volumes have contracted sharply over the past few quarters. Nonresidential spending continues to grow at a healthy pace, largely due to massive spending on new manufacturing facilities and ongoing infrastructure investments.?

Other nonresidential segments continue to slump. Commercial-related construction activity, for instance, is down 13.4% over the past year. That’s largely due to slowing activity in the warehouse segment, which has grown to account for over half of the commercial category.

Even with some sectoral weakness, the industry continues to add jobs, with total construction employment growing in each of the past five months. That should continue over the next couple of quarters; more than 45% of contractors intend to increase their staffing levels over the next six months, while just 13% intend to trim down, according to ABC’s Construction Confidence Index.

Michigan contractors have added jobs faster than average, with statewide industry employment rising to a new all-time high in August. Consider that Michigan’s construction employment is up 8% over the past year, significantly outpacing the growth rate of all statewide employment (+1%) and nationwide construction employment (+3%). While some of the growth is due to the base effects—Michigan lost a larger share of construction jobs than any other state at the start of the pandemic—the recent spate of hiring is still a positive indication for the industry.?

Contractors in Western Michigan have added jobs at a blistering pace through the first eight months of 2024, with industry employment up more than 15% year to date. Hiring has been particularly brisk in the Grand Rapids and Kalamazoo regions, although the Muskegon and Niles-Benton Harbor areas have also seen healthy hiring levels recently.?

While Western Michigan’s construction industry continues to benefit from a few massive electric vehicle megaprojects, the region is subject to the same headwinds as the remainder of the nation. That includes a sluggish residential construction segment, with statewide building permitting still below pre-pandemic levels and the lingering effects of high interest rates on certain nonresidential categories. While rate cuts will eventually bolster construction activity in the residential and nonresidential segments, those beneficial effects may not arrive for several quarters.

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Anirban Basu is the Chairman & CEO of Sage Policy Group, Inc., an economic and policy consulting firm based in Baltimore, MD, with an office in Orlando, FL. The firm provides strategic analytical services to various sectors, including energy suppliers, law firms, medical systems, government agencies, and real estate developers.

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