Construction Spending Disappoints in March

Construction spending dropped 0.9% in March after being revised down from what had been a more favorable reading for February. Losses were greater in the public sector than the private sector, and double the decline the market expected.

Residential construction was particularly weak in the private sector. A sharp drop in single-family home construction and remodeling more than offset a modest increase in multifamily construction. The pace of new home construction remains well below the pace of new household formation and needed replacement for older, dilapidated properties. The housing bust and years that followed left more of the existing stock in disrepair than during previous housing cycles. The existing stock of homes on the market is also showing signs of age.

Nonresidential construction held up somewhat better, eking out a moderate 0.5% gain. Lodging and general office construction picked up a bit, while retail construction took a beating. Warehousing construction was up, reflecting the shift from more traditional retailers to online spending. There were also gains in the manufacturing sector. The only subgroup posting strong gains from one year ago was construction of plants for manufacturing computers, electronic equipment and electrical equipment. Construction in that category was up nearly 85% from a year ago but from a very low base.

Public construction dropped 1.3%, with losses at the federal, and state and local levels. The drop in construction spending at the federal level more than doubled the declines at the state and local levels. This all comes as the president and Democrats in Congress have agreed to a much needed, $2 trillion infrastructure package, which appears dead on arrival given the unwillingness to agree on how to pay for repairs and upgrades to our nation’s dilapidated infrastructure.

Bottom Line
Construction spending disappointed but not enough to change the estimate of GDP for the first quarter, which was released last week. Residential construction was already weak in that report, posting its fifth consecutive quarter of declines.

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