Debt Ceiling Breach Could Impact Construction Starts

A Dodge Construction Network (DCN) report indicates that a U.S. debt ceiling breach could shrink total construction starts by 3%-14% in 2023-24. According to DCN’s Economics Group, the number of total construction starts could be impacted by two debt ceiling scenarios published by Moody’s Analytics: a short and prolonged breach.

A Dodge Construction Network report indicates that a U.S. debt ceiling breach could shrink total construction starts by 3%-14% in 2023-24.

A short breach involves a debt limit breach in June, followed by quick Congressional action. Under this scenario, the U.S. would enter a brief recession. As for the prolonged breach, the debt limit would be surpassed in June, but Congress would not be able to resolve the issue until July. This would trigger a deep recession.

DCN’s data indicates that under a short breach, total construction starts would fall by 3% instead of climbing by 2%. Commercial and residential starts would plunge most and remain down in 2024. Under a prolonged breach, total construction starts would fall by 14% in 2023 and 9% in 2024.

“Much like the financial crisis, all verticals—even those buoyed by the Infrastructure Investment and Jobs Act (IIJA), Creating Helpful Incentives to Produce Semiconductors and Science Act (CHIPs), and the Inflation Reduction Act (IRA)—would suffer in 2023 and 2024,” write DCN officials. “From peak to trough, total construction starts would lose roughly 30%. This is more ‘mild’ relative to the 40% peak-to-trough decline in 2007-2009 as it is assumed that IIJA, CHIPs, and IRA funds would slowly begin to flow back into the market in Q4 of 2023.”

The likelihood of these scenarios occurring seems unlikely, state DCN officials. However, they add that should these events happen, the economy is in good enough standing that construction starts would eventually recover in 2024.

Big picture, failing to lift the debt ceiling would trigger a default that would impact financial markets and drive interest rates higher on everything from car payments to credit cards. The debt ceiling is simply the cap on how much the U.S. can borrow—from banks, investors, foreign countries, etc.—to help pay for the spending Congress has enacted.

Any deal to raise the $31.4 trillion debt limit must pass both chambers of Congress before President Joe Biden could sign it into law. The U.S. Treasury has warned it could not pay all its bills as soon as June 1, 2023.