Construction Shakes March Weakness

Construction spending during the month of March came in at a seasonally adjusted annual rate of $1.36 trillion, almost 1% higher than revised February spending, and 4.7% higher than March of 2019. Residential construction, both from private and public sectors, lead the growth in spending; the private sector accounts for almost 99% of all residential spending. Residential investment was on a tear during the first quarter of 2020, clocking in at a 4.9% quarterly growth rate, the highest since Q4 of 2012. Private nonresidential construction spending continued a downward trend for 2020, down 1.3% in March compared to February, and down 1.8% compared to one year ago.

According to the Association of General Contractors (AGC), up to 19% of projects that were scheduled to start during the second quarter have been cancelled; concerns over COVID-19 infections were the primary reason, with a third of respondents reporting a shortage of personal protective equipment (PPE). Public nonresidential spending, especially on projects such as highways, public safety, water and power, rose almost 2% in March compared to February, and almost 8% compared to March of 2019. Many of these projects are funded at the state and local levels; those budgets are being depleted fast. The aid for states in the CARES Act passed by Congress so far will not be enough to plug the holes created by the COVID-19 crisis, let alone help stimulate the economy when states reopen.

Although most states that implemented shutdown procedures deemed construction work to be essential, many projects were cancelled or put on hold. The Bureau of Labor Statistics (BLS) reported 29,000 construction jobs lost in March, the largest drop in more than a year; more losses are still to come. Data from the recruiting website Indeed show that construction job postings fell 34% in the third week of April compared to last year. The silver lining is that some of those job losses may be recovered by Paycheck Protection Program (PPP) loans and grants for small businesses. The Small Business Administration (SBA) reported that in the first round of PPP loans ($349 billion), $44 billion went to the construction sector, the largest portion. A survey conducted by the AGC found that 74% of respondents had applied for the loans while 13% added workers (up from 9%) and 35% furloughed or terminated workers (down from 40%).

Bottom Line
Construction spending was supported by strong residential and public investment in March, but the April data will be ugly. While this is the first service sector-induced recession in history, construction and manufacturing are not immune. The fiscal aid provided by Congress in the CARES Act is only the first step in helping the economy recover more quickly once states reopen. More will need to be done to preserve state and local budgets and to stimulate the economy through infrastructure spending. There has been talk of an “infrastructure week” for years; it’s time to get a bill on the books.

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