Contraction in Construction

Spending in the construction industry contracted by more than 1.0% in June. Public sector losses far outpaced losses in the private sector. Construction activity in education suffered the largest drop. Utilities also suffered a blow, but the losses were coming off a much smaller base. Public sector infrastructure spending was weak at the federal, state and local levels. The most recent increases in the federal budget did not include spending for infrastructure, which is desperately needed. State and local governments are starting to see pension pressures squeeze other types of spending.

Private sector losses were also broad-based. The greatest weakness occurred in the retail sector with the exception of warehousing, which is getting a boost from the shift to online retail. The rest of retail is enduring another flurry of store closings that are starting to take effect after announcements late last year and early this year.

Residential investment fell with losses particularly in the multifamily sector over the single-family market.

One notable outlier was manufacturing capacity. Fabricated metals got a boost largely from tariffs and the need to replace imports; gains were off of low levels. That is at the same time that the newly released Purchasing Managers’ Index (PMI) and Institute for Supply Management (ISM) surveys warned about a slowdown in exports and narrowing margins among steel and aluminum producers. They expect to see price hikes that will show up in a much more pronounced way in response to tariffs during the third quarter. This is something that is being closely watched in the Federal Reserve meeting today as Fed officials as discuss raising rates at their next meeting in September.

Construction in amusement and recreation remained robust in June. Social centers had the largest gains, reflecting the rising ranks of retirees who are leaving the labor market. This sector continues to ride the wave of increased spending on vacations. We saw the trend also in the personal expenditures report, which showed strong growth in spending on food and accommodation in June. Construction of lodging picked up slightly but the pace of new space coming onto the market is slowing.

Bottom Line
Construction spending suffered a setback in June, just one piece of bad news in what has been an improving outlook for the U.S. economy. A few pockets of strength were more than offset by widespread declines. Acute shortages of construction workers and escalating materials costs exacerbated by tariffs are contributing to the weakness in construction activity.

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