Wednesday, 20 of June of 2018

Economics. Explained.  

Construction Spending

May 1, 2018

Construction spending (the green bars above) declined 1.7% in March after having risen 1.0% in February 1.7% in January and 1.6% in December.  Over the past year it has risen 3.6%.  This is the first decline in construction spending since July of last year.  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.  Having said all of that, construction spending has risen 3.6% in the past year but 7.9% in the past six months.  Thus, it appears to be gathering momentum

Private construction fell 2.1% in March but after significant gains in each of the previous four months..  Over the past year private construction spending has risen 3.9%.   The 3.9% increase in the past year reflects a 2.2% increase in private non-residential construction and a 5.3% increase in the private residential category.

Within the private construction spending category, residential spending declined 3.5% in March but sizable increases in each of the previous four months.   Over the course of the past year private residential construction has risen by 5.3%.  The shortages of both homes available for sale and apartments will push this series higher in the months ahead, however the scarce availability of labor will limit its rise.  Construction of private single family homes has risen 9.7% in the past year, multifamily construction has fallen by 8.2%.

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 fell 0.4% in March after having risen 1.4% in February.   During the past 12 months nonresidential construction has risen 2.2%.  To get more lift in the investment spending component of GDP we need this component to turn more sharply upwards.

Public sector construction was unchanged in March after  having risen 0.1% in February and 2.2% in January.  This category can be quite volatile on a month-to-month basis.  Over the past year such spending has risen 3.0%.  It will probably rise more quickly than that for 2018 as a whole, perhaps 5.0%, given the recently approved increase in defense spending.

Stephen Slifer


Charleston, SC

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