Dodge Economist: Prepare for a Rocky First Half of 2023

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Updated Jul 21, 2023
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Inflation will determine the path of the U.S. economy in 2023, says Richard Branch, chief economist for Dodge Data & Analytics.

“The Federal Reserve will get inflation down even if they have to break the back of the economy to do so,” Branch said during the 2023 Dodge Construction Outlook Conference on November 15.

“We’re walking a razor’s edge here, but in our estimation, there is a very, very narrow path to avoiding a technical recession.”

That forecast assumes that core inflation continues to improve – meaning the Fed stops raising interest rates in March and holds steady throughout the rest of the year – and that “nothing else crazy happens in the world.”

For Branch, the biggest causes for concern are:

  • Relations between China and Taiwan
  • Further escalation of the war in Ukraine 
  • More oil production cuts from OPEC
  • And a U.S. rail strike

If things remain fairly stable, and Branch’s predictions hold true, the economy should stabilize and start to recover in the back half of 2023.

[Watch: Mid-Year 2023 Forecast: Where Does the Construction Economy Go from Here?]

The impact on the construction industry should be mild, and Branch says there are a few factors working in the industry’s favor: a strong banking system and a woefully undersupplied housing market.

Overall, total construction starts rose 17% in 2022 and are expected to remain flat in 2023 – a relatively optimistic forecast for a period of anticipated economic stagnation.

“There are a lot of projects sitting in the planning cycle waiting to break ground,” says Branch.

“We’re sitting at 14- to 15-year highs in the Dodge Momentum Index, so it should provide some semblance of confidence and reassurance that developers and owners are continuing to put projects into the queue despite the fact that we’re concerned about what might happen when interest rates keep rising and the economy slows down in 2023.”

Total Construction Starts Slow in 2023Dodge Construction Network

Skilled labor remains a challenge

Worker shortages will be the biggest hurdle for the industry to overcome. Although there has been some volatility over the past several months, job openings remain at record levels.

Current Job Openings in ConstructionDodge Construction NetworkBranch cautions companies against laying off too many workers in the first half of the year. It’s a move that could make rehiring even more difficult when the economy recovers.

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“As I look at that five-year horizon, I don’t see a real significant improvement in attracting skilled labor into the industry. What this is going to do is continue to put a ceiling on the amount of work we can get done, of course, barring technological changes and productivity enhancements.”

Material prices to improve

Some good news for the industry comes in the form of declining material prices.

The Producer Price Index, a composite index of construction materials, indicates that material prices and bid price inflation peaked between late 2021 and early 2022.

Construction material prices vs. demandDodge Construction NetworkWhile the market is improving, material prices will be impacted differently based on demand.

“I think there’s going to be enough demand for certain types of construction that will keep some upward pressure here on prices as we go through 2023,” says Branch. “But I do think that inflation will start to cool in the back half of next year.”

2023 construction outlook by sector

Branch says some sectors of the U.S. economy and the construction industry will “feel recessionary” in 2023, but there are some bright spots.

Here’s a rundown of how Branch predicts the economy will affect construction starts in various construction industry segments in 2023:


Single-family housing: Starts down 6% in 2023.

Rising interest rates and low inventory has pushed housing affordability to its worst levels in almost 15 years.

The demand for single-family housing will still be robust, just weaker than in 2021. The trough of the market will hit in late Q1 and early Q2 as mortgage rates stabilize.

Multi-family housing: Starts down 9% in 2023.

Meanwhile, the multi-family housing market is coming off its best year since 1986. While growth will still be solid, investment dollars for multi-family construction projects typically dry up when the economy slows down.

Overall, the residential market will experience a mild downturn.

“By our estimation, the housing sector is still 3 million units shy of full supply. So, once the economy gets its legs back, we should start to see construction pick up again,” he said.

The single-family market can expect to see gains again in late 2023, and the multi-family market is expected to rebound in early 2024.

U.S. Residential Building Starts 2023Dodge Construction Network


Commercial: Starts down 3%.

The commercial construction market tends to follow the residential business cycle, meaning the residential slowdown in 2022 will hit the commercial market in 2023. Commercial construction includes new construction, additions to buildings and renovations.

Branch says despite the anticipated decline, the bad side of the commercial construction market is isolated to two different property types: warehouses and office construction.

“2022 was the peak year for warehouse construction,” says Branch.

Amazon has since realized it overbuilt the market and has scaled back on new starts. Projects built by Amazon or for Amazon represent 16% of the total warehouse market. “Them pulling out of the market is going to drive activity lower here. We’ll see levels come down, but overall, they should remain historically very high.”

Office construction has been undercut as companies give in to employee demands for remote work, but a recession could alter that balance of power in the future, Branch says.

Bright spots for the commercial segment include retail and hotels.

“The levels of activity for retail are still reasonably high, certainly relative to the kinds of construction we saw in the wake of the Great Recession,” says Branch.

“The other really good news is, over the last five to 10 years, we haven’t had an upgrade cycle for hotels. We missed one with the pandemic, and that’s going to take another kick in 2023 because of the economy. So, I do think we’re setting ourselves up for a stronger recovery once we get a little further down the road. We just need to be patient in getting there.”

Top year-to-date commercial construction projectsDodge Construction Network

Manufacturing plants: Starts down 43%. This is still a historically strong number and would be a record if not for the 196% growth experienced in 2022.

Since the pandemic, Branch’s outlook for manufacturing construction has been rosy. More companies are opting to shift production back to the United States, especially as the CHIPS Act and Inflation Reduction Act have incentivized those moves.

“You need to go back to the early '90s to see the kinds of square footage that we expect to break ground in 2023,” he says. “We’ve significantly raised our forecast for not just 2023, but beyond due to the impact of the CHIPS Act and the IRA. This is a real game changer in terms of stabilizing the construction sector.”

Manufacturing Construction Starts 2023 outlookDodge Construction Network

Institutional: Starts will remain flat.

Government funding will provide stability for the institutional sector, which includes government, education and healthcare projects. Regions with strong demographic growth, such as the Carolinas, Florida, Texas, Nevada and New Mexico, will fare better than those with declining populations.

Education starts will be led by the need to update legacy K-12 and college campuses for the next generation of students, as well as growth in the lab space.

Sharing many of the same drivers as retail construction, healthcare is one of the biggest opportunities in the institutional sector. The segment includes inpatient hospitals, nursing homes and stand-alone clinics.

Transportation will also see big gains in the form of airport terminal upgrades. JFK alone accounts for $11 billion in project funding in 2023.

This chart gives a breakdown of Branch’s predictions for the entire sector:

U.S. Institutional Building Starts 2023 outlookDodge Construction Network

Public Works

Environmental public works starts are all set to rise with dams/reservoirs up 15%; water supply systems up 12%; sewage and waste up 17%.

Non-building/infrastructure starts up 16%. 

Driven by infrastructure funding, infrastructure and public works projects are expected to see the biggest gains in 2023.

But delays in funding approval by Congress add risk to that equation.

A continuing resolution is in effect until mid-December. If Congress decides to kick the can down the road until January, the appropriation process will be delayed and more of that funding will get pushed out to 2024.

Branch says that marginal effects may be felt during the appropriation process because of the new Congress. “With a Republican House, I don’t think that impacts streets, bridges, roads, water or sewer. There is broad bipartisan support for those projects. Where I think we could see some nibbling on the edge is more on the green provisions, either in the Infrastructure Act or in the Inflation Reduction Act.”

Looking just at roads and bridges, only 19% of funds from the infrastructure package have been allocated so far. “There’s a lot of money still on the table waiting to be spent. We continue to think that 2023 and 2024 are the best years for infrastructure construction. But I could foresee, again, if we have appropriation delays, that maybe it’s 2024 and 2025 are the best years.”

The charts below give Branch’s forecast for the sector: 

U.S. Non-Building/Infrastructure Construction Starts 2023Dodge Construction Network

Nonbuilding construction starts 2023 outlookDodge Construction Network

What happens if there is a recession?

Without being perversely positive, Branch said the construction industry shouldn’t expect much change if there is a recession.

Residential and commercial construction will take the brunt of the blow and be noticeably weaker than forecasted. Healthcare construction will decline some but not much. And manufacturing and infrastructure funding will remain stable due to the infusion of government funding into the sectors.

“A recession would lower the demand for construction workers. That’s certainly good news for both infrastructure and manufacturing. It would also put more downward pressure on prices than we anticipated,” Branch says.

“If we go into a recession in 2023, it could mean for manufacturing and infrastructure that more real work gets done for the dollars allocated.”

Downturns in construction starts during previous recessionsDodge Construction Network

Recession simulation for U.S. total construction startsDodge Construction Network