Construction Spending Slows Sharply

Total construction spending fell in June to $1.29 trillion, a 1.3% drop compared to May and off more than two percent compared to a year ago. Private construction, which accounts for the majority of construction spending, slipped in June on a monthly basis but fell more than four percent compared to this time last year. Residential construction usually leads this category but has been muted this year. Headwinds in the housing market, such as a tight labor supply and increasing material and land costs, are largely to blame. Nonresidential private construction spending declined slightly, following a spurt of activity in March.

In the public sector, construction spending dropped 3.7% in June compared to May, led by state and local governments as spending on education and highways fell more than six percent each. Higher-than-average state and local tax revenues in fiscal year 2018 coupled with a one-time uptick in tax collections in April boosted state and local government spending earlier in the year, particularly in construction. That revenue boost is not sustainable, therefore spending is expected to slow further. One effect of lower government spending during the second quarter means we could see GDP revised down to 1.9%. Despite government promises, significant infrastructure spending has yet to be allocated to our nation’s crumbling highways.

Bottom Line

Following yesterday’s rate cut from the Federal Reserve, the economic data support the decision to provide an insurance cut against uncertainties over trade policy and global slowing. The construction industry is feeling the effects of higher tariffs and immigration limits.