Mild Weather Boosts Construction

Construction spending in January came in at a seasonally adjusted annual rate of $1.37 trillion, a 1.8% monthly increase from revised December figures and the fastest pace of growth in two years. Compared to January of 2019, construction spending rose 6.8%, marking the fourth straight month of annual growth. Both private and public construction spending increased during the month as mild weather and strong consumer and builder sentiment provided an environment for investment growth. Construction spending has not yet felt the impact of the novel coronavirus (COVID-19), but risks are to the downside.

Private construction spending, which consists of residential and nonresidential construction, grew by 1.5% for the month and almost 5% annually. Residential construction, boosted by low mortgage rates and unseasonably warm weather, continued to show strength with a seventh consecutive month of spending growth. Nonresidential construction spending, which had been growing on an annual basis but not as quickly as residential construction, saw a small boost in spending, but those investments can be short-lived. Spending on lodging construction fell almost 9% on an annual basis. That trend will continue as disruptions to travel and tourism caused by COVID-19 precautions will upend the industry. Many hotels have already reported significant losses since the quarantine in China began last month. This will translate into losses in hours, wages and investments from hotel chains. Job openings for construction workers declined for the second month in a row in December, while layoffs were up to the highest figure since December of 2016.

Public construction spending, comprised mostly of state and local spending, was up 2.6% for January compared to December and almost 13% compared to January a year ago. The state and local component provided most of that boost, with projects for highways and streets, transportation structures and educational structures seeing the biggest increases in spending. Federal government spending, less than one-tenth of total public spending, was also up on the month due to boosts in all categories of spending except education and highways and streets.

Separately, the Institute for Supply Management (ISM) manufacturing index came in at 50.1 in February, which is in expansionary territory but only by a hair. Disruptions associated with COVID-19 pushed orders and employment into contraction territory. Builders have been slower than other industries to warn about the downside of COVID-19 but they are concerned about materials shortages. Home buyers are also expected to pull back as the fear associated with what the virus could mean for employment sets in. Cancellations for real estate purchases by wealthy Chinese tourists have already accelerated.

Bottom Line
January data were enhanced by unusually mild winter weather but rapidly out of date given the disruptions we are seeing in response to COVID-19. Delays in material shipments and production of construction equipment, along with the fear factor triggered by the virus, will eventually take a toll on construction activity. Lower interest rates and weaker steel, copper and energy prices cannot do much to offset losses tied to fear.

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