Construction Spending Grows in 4Q

November construction spending topped expectations, coming in at a seasonally adjusted annual rate of $1.32T, a 0.6% gain on October’s revised figures. Compared to November of 2018, construction spending is up 4.1%, the largest year-on-year gain since September 2018. Private residential construction led the pack, while private nonresidential construction lagged behind. Public construction spending continued to show monthly and yearly gains.

Private residential construction grew almost 3% compared to November of 2018; gains were concentrated in the home improvements market. Low mortgage rates and strong consumer confidence have prompted homeowners to take on home equity loans or cash-out refinancings and use that money toward renovations and purchases of durable goods such as washers and refrigerators. While spending on single-family home construction was flat on an annualized level, spending was up compared to October, capturing the renewed strength and confidence that home builders showed late in the year. Multifamily construction spending, however, was down almost 4% on an annual basis and remained flat month-over-month. This segment of the market is more volatile; swings in spending are not too uncommon. Building permits were up to multi-year highs in November, signaling that private residential construction will continue to buoy spending into the end of the year and start of 2020.

Private nonresidential construction spending continued to be weak in the third quarter, coming in at a 1.2% decline compared to October and flat compared to November of 2018. Small gains in communications infrastructure were offset by steep losses for hotels, commercial, education, power and manufacturing construction spending. On an annual basis, education infrastructure spending dropped by double digits due to losses in enrollment in all levels of education. In total, about 2.2 million fewer people were enrolled in school in 2018 than in 2011. Not only do these losses affect infrastructure spending, but have significant spillover effects into other areas of the economy especially when labor markets are tight and a large portion of the population is reaching retirement age.

Public construction spending was up almost 1% compared to October and over 12% compared to November of 2018. Gains in state and local government spending make up most of that figure, but federal spending rose as well. With the recent passing of the federal spending bill relieving fears of another government shutdown, we expect public construction spending will continue to grow in the fourth quarter, especially for nonresidential projects such as highways, sewage systems and power infrastructure.

Separately, the Institute for Supply Management’s manufacturing index remained in contractionary territory, with December’s figure coming in below expectations for the fifth month in a row. The weakest components of the index, production and backlog of orders, have been contracting for 5 and 8 months, respectively. The pace of new orders continues to disappoint respondents. Uncertainty over trade and tariffs remains top of mind for many.

Bottom Line
Revised October figures to the upside show that total construction spending is growing at a moderate pace and, coupled with growth in November spending, will provide a fourth-quarter boost to overall GDP. Public spending and residential investment will contribute to growth while nonresidential private investment will continue to show weakness as uncertainties over trade policy, geopolitical conflict and climate change create headwinds for businesses.

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