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Unseasonably Warm Weather Not Enough to Lift Construction

RFP
December construction spending came in at a seasonally adjusted annual rate of $1.33 trillion, a 0.2% decline compared to November data. November spending was revised up to $1.33 trillion. The slowdown was caused by a drop of 1.8% in nonresidential private construction spending; public construction spending was also down, but only by 0.4%. Private residential construction spending continues to show strength, with December 1.4% above November. Total construction spending in 2019 was $1.3 trillion, about 0.3% lower than in 2018. That marked the first annual decline for construction spending in eight years.

Private residential construction was 5.5% higher in 2019 than in 2018. Over half of construction activity occurred in the single-family housing market, up 5.2% on an annual basis. The most significant spending growth, at 10.5%, was in the home improvement market. Low mortgage rates caused a surge in refinancing that in turn provided a boost to spending on home renovations and furnishings.

Multifamily housing construction, while only one-tenth of private residential construction spending, dragged on growth with a 7% year-over-year decline. Builders have turned to building more luxury apartment dwellings in recent years to combat the high costs of land and labor that are squeezing their margins. Estimates show that up to 80% of new apartments on the market are in the luxury price range. The number of renters who are cost-burdened, spending more than 30% of their income on rent, is rising.

Private nonresidential construction came in flat in 2019 compared to 2018. Spending on two of the biggest components of nonresidential construction, power and manufacturing, exceeded 5% while another key area, office structures, rose 4%.

Spending on commercial construction fell by 4% on an annual basis. Commercial construction spending hit a record peak in February 2018 and has been on a gradual decline ever since. Lodging has slowed after surging earlier in the cycle. A large backlog of projects came on line at the same time that Airbnb inventories skyrocketed in the hottest metro areas.

Public construction spending, while slightly lower for the month, was up almost 12% compared to 2018. Over 90% of the spending comes from state and local governments, whose spending was up 11%, driven by spending on highways and streets and education structures. Federal construction spending, up 17% compared to 2018, was driven by boosts in conservation and development, public safety and transportation structures spending.

Bottom Line
Unusually mild winter weather should have provided a boost to construction spending in December, but it did not. That means the weakness we saw in construction was probably even worse than it appeared, given how the data is seasonally adjusted. The strongest component, spending on residential housing, showed strength but construction should have increased in all areas. Spending in the earlier part of 2020 will look stronger compared to 2019 when the polar vortex limited new construction.

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