More Inflation and Likely Recession—Economic Outlook for ’23 Not Particularly Upbeat

Anirban Basu

Anirban Basu is Chairman and CEO of Sage Policy Group, Inc., an economic and policy consulting firm headquartered in Baltimore, Maryland. He serves as the Chief Economist to Associated Builders and Contractors and as Chief Economic Adviser to the Construction Financial Management Association. In 2007 and then again in 2016, Mr. Basu was selected by the Daily Record newspaper as one of Maryland’s 50 most influential people. The Baltimore Business Journal named him one of the region’s 20 most powerful business leaders in 2010. Learn more by reading his newsletter Sage Economics at

December 1, 2022

The economic outlook for 2023 can only be described as precarious. Risk is everywhere apparent, taking the form of the potential use of tactical nuclear weapons, an ever-mutating virus, and a possible assault on global chipmaker Taiwan. One can add in more prosaic considerations, including still shaky supply chains, rampant inflation, rising interest rates around the world, and structural shortages of skilled workers in the United States and elsewhere.

To date, the U.S. economy, led by its intrepid consumer base, has been able to fend off many challenges. Consumers have stared inflation in the face and kept spending. Corporate profits have remained elevated, as enterprises identify additional reservoirs of pricing power. Government spending remains elevated at virtually all levels, with the federal government passing a long-awaited infrastructure package in late 2021. Little of that money has been spent to date.

But portents of woe are ubiquitous. In America, the yield curve is inverted, one of the ways that the bond market indicates that something is very wrong. Home prices are now falling in much of the United States in the context of surging mortgage rates. Job growth is slowing. Financial markets are volatile.

For mechanical insulators, matters may not deteriorate anytime soon. Many firms report lengthy backlog and are continuing to operate at capacity. The good times may not last, however. Indeed, it is unlikely they will. The Federal Reserve remains committed to undoing what they have done, which was to overstimulate the economy and allow inflation to become ingrained as inflation expectations ramped higher. Now, they are ratcheting borrowing costs higher to slow the economy in order to slacken demand, driving price pressures lower. The problem is that in their effort to return the economy to its 2% inflation target, policymakers may drive the economy deep into recession.

At the heart of the Federal Reserve’s challenges is what remains: namely, a red-hot U.S. labor market. As of August, there were more than 10 million available, unfilled jobs in the United States, or approximately 1.75 job openings for every unemployed American. With the labor force participation rate remaining stubbornly below its pre-pandemic level, and with demand for goods and services remaining elevated, many employers continue to struggle to staff up fully.

In order to better retain and recruit staff, many have rapidly expanded compensation levels, which represents a principal element of American inflation. Over the past year, average hourly earnings have risen in the range of 5%. The Federal Reserve will need to undo that labor market strength to slow the pace of compensation increase in order to reestablish a 2% inflation regime. The transition will be painful.

Unfortunately, this complicates the outlook for mechanical insulators. Real estate and construction are among the most interest rate–sensitive segments of the economy. As borrowing costs rise, there is less interest in investing in real estate, whether among small-time individual investors or enormous hedge funds. The loss of investment momentum is typically attendant with less demand for construction services.

Behavioral changes rendered by the pandemic further complicate the analysis. The increasing pervasiveness of remote work, online shopping, and business meetings conducted using Zoom and a bevy of other online platforms has weakened the performance of office, shopping center, and hotel segments. That has been at least partially offset, however, by the strength of construction in sectors like healthcare, fulfillment centers, data centers, and schools. Despite several solidly performing business segments, investment in nonresidential structures has been erratic in recent quarters, and that was true even when borrowing costs were far lower.

Domestic Policy Support

Washington’s push for clean and renewable energy will be a driving factor in the mechanical insulation market. The current administration’s Inflation Reduction Act (IRA), passed in late summer, directs significant funding toward clean energy and climate change initiatives. The legislation represents the largest investment in fighting climate change in history. The Infrastructure Investment and Jobs Act passed in late 2021 also includes climate change provisions.

These policy maneuvers are a major boon to the mechanical insulation market. Among the provisions in the IRA is the doubling of tax credits to retrofit existing structures. Before the law, the maximum allowable subsidy for an Energy Efficient Tax Deduction was $1.88 for each renovated square foot. The IRA increases that amount to $5.00. In order to fully comply, key building systems need to substantially reduce energy consumption. Among these systems are HVAC and hot-water systems.

The increased tax credit also would encourage the use and development of new technologies. Jameson Hartman, Vice President at the investment firm Real Estate Technology Ventures, is quoted in a recent Globe Street article saying, “We should see substantial growth of technologies and platforms that fall under the energy efficiency landscape, including investments in solutions that improve a building’s envelope, HVAC systems, and interior lighting systems.”

International Concerns

A comprehensive new study from the World Bank indicates that the world may be edging toward global recession in 2023. There is also a string of financial crises in emerging market and developing economies that could do them lasting harm, which has the potential to further destabilize geopolitics. Even in the absence of financial or other crises, the global economic outlook looks bleak. According to the World Bank, central banks around the world have been raising interest rates in 2022, with a degree of synchronicity not observed over the past 5 decades. This is likely to continue into 2023. While America’s domestic market is sufficiently large to shield many suppliers from a weak global economy, the world’s travails are likely to impact the profits of multinational corporations, reinforce financial market volatility, and weaken U.S. exports to the balance of the world.

Perhaps Past Peak Inflation, but Prices Still High

The latest data from the U.S. Bureau of Labor Statistics indicate that nonresidential construction input prices have been leveling off. Economy wide, it appears that the worst of supply chain issues was suffered around December of 2021. As of August 2022, the last month for which there are data, prices were down 1.4% compared to the previous month. The decrease was mainly caused by a drop in prices for steel and steel mill products. Prices of the former fell 5.1%, while the latter dropped 5.7%. Despite some evidence of disinflation, construction materials’ prices in August 2022 were still nearly 17% higher in the aggregate than during the same month 1 year prior.

My Kingdom for a Talented Construction Worker

While inflation, Federal Reserve policymaking, and geopolitical turmoil represent threats to the construction sector’s cyclical momentum, the shortage of skilled tradespeople is a structural issue. Industry demographics complicate matters. Many of the nation’s most skilled construction workers are within a decade of retirement. According to the National Center for Construction Education & Research, approximately 41% of the current construction workforce, including those performing managerial functions, will retire by 2031.

At the same time, too few young people are entering the construction trades. There are many alternative options, of course. But there is also a lack of exposure in schools to the pathways to prosperity offered by many occupational categories that have little connection to 4-year college degrees. Not coincidentally, average hourly earnings for construction workers have increased 11% over the course of the pandemic, with recent quarters associated with the fastest growth in construction compensation in 4 decades. Upward pressure on wages is poised to persist. As of August, there were more than 400,000 available, unfilled construction jobs in America.


For now, many firms operating in or around the U.S. construction industry remain upbeat. Industry surveys expect sales, employment, and even profit margins to expand as we approach and enter 2023. However, the outlook dims in the longer term, as higher interest rates and pervasive pessimism begin to undo current economic momentum. Risk of recession in 2023 is elevated. Eventually, the loss of economy-wide momentum is likely to catch up to construction, with perhaps many contractors experiencing greater market headwinds in 2024 once current backlog is dissipated. As noted, the outlook may be better for mechanical insulators, given the widespread desire to improve the energy efficiency of existing HVAC and related systems.