Wednesday, 22 of May of 2019

Economics. Explained.  

Construction Spending

May 1, 2019

Construction spending (the green bars above) fell 0.9% in March after having risen 0.7% in February.  Over the past year it has fallen 0.8%.  Not only is this a very volatile series with large swings from month to month, even the previously released data can revise substantially.  Furthermore, the series can be distorted by big swings in public construction spending.  Construction spending came to a halt last year driven largely by a drop in residential construction, single-family homes in particular.  But construction spending rebounded sharply in January and February before retreating in March.  Our expectation is that construction spending will continue to climb slowly.

Private construction fell 0.7% in March after having declined 0.2% in February.  Over the past year private construction spending has fallen 3.6% which reflects a 2.1% increase in private non-residential construction and an 8.4% decline in the private residential category.

Within the private construction spending category, residential spending fell 1.8% in March after having dropped 0.4% in February.   Over the course of the past year private residential construction has fallen 8.4%.  However, home sales have rebounded sharply in the past couple of months which should lead to a pickup in this category in the months ahead.  Furthermore, shortages of both single family homes available for sale and apartments will push this series higher in the months ahead.  The problem is that the scarce availability of labor will limit its rise.  Construction of private single family homes has declined 8.2% in the past year, multifamily construction has risen 11.1%.

The Census Bureau tells us that on average 1.2 million new households are being formed every year.  Those families need a place to live.  It could be a home.  It could be an apartment.  Replacement demand should add about 0.5 million unit to that for a total demand of 1.7 million or so units per year.  Currently, builders are starting about 1.2 million units per year.  But keep in mind that housing starts have fallen way short of demand for the past nine years. Thus, the demand for housing will remain strong for the foreseeable future which will keep construction workers fully employed for some time to come.

Private nonresidential construction rose 0.5% in March after having risen 0.1% in February   During the past 12 months nonresidential construction has risen 2.1%.  To get more lift in the investment spending component of GDP we would like this component to turn more sharply upwards.

Public sector construction fell 1.3% in March after having climbed 3.2% in February nd 5.8% in January.  This category can be quite volatile on a month-to-month basis.  Over the past year such spending has risen 8.6%.  It will probably rise about 7.0% this year given the increase in defense spending approved in January.

Stephen Slifer


Charleston, SC

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