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Construction Rebounds on Public Works Projects

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Construction spending jumped 1% in February, driven by a strong 3.8% jump in public works projects at the state and local levels. This is critical as state and local government spending faltered in the fourth quarter; it now looks poised for a rebound. Gains were strongest for highway and street repairs, which are desperately needed. The polar vortex took an even greater toll on our dilapidated infrastructure.

Construction of convention centers and neighborhood social centers also posted strong gains. The competition for convention dollars across cities continues to intensify.

Private sector construction increased a tepid 0.2% in February after posting a more solid 1.4% gain in January. Home improvements increased while the number of larger single-family and multifamily construction projects continued to contract. There is hope for a rebound in single-family and multifamily construction later in Spring. Escalating costs and restrictive zoning laws have been making it difficult for builders to move downscale to where the demand is greatest. In fact, housing starts have been trailing household formation during this expansion.

Commercial real estate took it on the chin with the exceptions of building material stores and warehousing, where spending remains strong. Store closings at traditional retailers have picked up, while the push to online services intensifies.

Separately, the Institute for Supply Management (ISM) manufacturing index picked up more than expected in March, suggesting that a portion of the weakness we saw in the first quarter was transitory. The manufacturing index hit 55.3% in March, with solid improvements in orders, production and employment. There is optimism that tariffs on China may be lifted. Firms have complained that their petitions for exemptions from the tariffs were delayed by the government shutdown.

Bottom Line
We are entering the second quarter of 2019 with more momentum than the first quarter. Gains will not match the highs of 2018 but should reassure the Federal Reserve that a rare cut is not necessary yet.

Media Contact
Karen Nye
T +1 312 602 8973
Karen.Nye@us.gt.com
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