US market intelligence: continued resilience

Despite uncertainty, economic growth continues

Real Gross Domestic Product (GDP) made healthy gains in Q3 2023, recording growth of 4.9 percent at an annual rate. This rate of change is over twice as much as the 2.1 percent posted in Q2 2023 – increasing by 2.8 percentage points - and is the fastest recorded in seven quarters.

The strong labour market contributed to wage growth, which is rising above general inflation and this is circulating through the economy. However, with services inflation still elevated, recording 4.0 percent in October 2023, this may potentially require interest rates to remain high for a time.

Elevated interest rates will undoubtedly chip away at the increased consumer spending figures that elevated Q3 2023 GDP into such a prominent position, with a lagged effect materialising as higher borrowing costs kick in.

Recession talk doesn’t appear to be going away and the US economy may need to navigate through continued market turbulence. Despite that, the Federal Reserve, and the rest of the US, will be hoping to negotiate a soft landing going into 2024.

Construction activity remains strong but is tapering off

Seasonally adjusted annual growth rates in construction spending, measured at current values, have softened to 2.5 percent on the quarter and 7.2 percent on the year as of Q3 2023. Month-on-month data for August and September 2023 saw a fall of 0.4 and 1.0 percent respectively.

Residential activity, despite its first increase in five quarters, has struggled as interest rates take hold, and spending dropped by a notable 3.9 percent on the year to September 2023. This is the tenth month of consecutive month-on-year decreases.

Conversely, non-residential activity remains buoyant. Manufacturing spending has been strong, appreciating by 65.2 percent on the year in Q3 2023, albeit slowing down in recent months. Demand for computers and electronics, and the facilities needed to produce these items, has spurred this increase.

Escalation challenges easing

The cost to deliver construction projects continues to see escalation growth. While construction materials and services input costs have settled, bid prices – which aim to measure the trend of contractors' pricing levels in accepted bids – are less inclined to shift downward.

Following a period of absorption during COVID-19 and the ongoing conflict in Ukraine, contractors have been more able to pass on input cost escalation and recoup losses.

As of September 2023, materials and services input costs increased by just 0.1 percent compared to the 4.3 percent seen in bid prices.

Still, there are multiple competing forces behind escalation growth and a complex interplay of factors at work determining price setting. As a result, our escalation expectations for 2024 have shifted slightly downward - moving from 3.6 percent to 3.1 percent on average. Greater surety is sought in workloads, and contractors may well push prices down to ensure orderbooks and cashflows tick over.