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Construction Remained Weak in April

RFP
Construction spending dropped another 2.9% in May, the largest monthly drop since October 2018, but remains 3% above year-ago levels. Multifamily construction was hit harder than single-family. Persistently strong demand for single-family housing and extremely tight inventories, especially for first-time buyers, are putting a floor under the single-family market. Mortgage applications for home purchases rebounded in May after a lull in April; virtual home tours have soared. The concern is that a sharp increase in cuts to wages could dampen underlying demand over the summer. Though wealthier families have suffered less from COVID-19’s economic effects, the monthly Architecture Billings Index, a survey of architecture firms, remained in contractionary territory in April. Business conditions weakened further as the number of billings and design projects declined.

Prospects for a rebound in construction activity outside of the residential sector are much less certain. COVID-19 has accelerated the restructuring in the retail sector, moving up retail bankruptcies by about two years, while capital spending plans have been shelved. Office buildings face a precarious near-term outlook as social distancing and work-from-home policies are expected to persist until the end of 2020.

The shale industry, which had been a driver of construction activity when oil prices were above $50 per barrel, is another drag on activity. Investments in new and existing fields have come to a standstill as the shale industry struggles with the blow to demand triggered by the pandemic and the price war between Saudi Arabia and Russia; one of the goals there was to cripple shale oil production in the U.S.

Public sector construction was on hold during April. Some projects were literally abandoned midway through. That provides a whole new definition for shovel-ready projects and makes a strong argument for infrastructure spending. Without transfers to the states accompanied by a massive infrastructure bill, public sector construction will be cut; that includes major state university projects.

Last but not least will be the need to rebuild in the wake of rioting and looting following protests around the death of George Floyd in Minneapolis. The damages are much like those following a natural disaster. Some rebuilding will be covered by private sector insurance. Sadly, the legacy of race riots in the 1960s and 1990s is that they had the most lasting and detrimental effects in the hardest hit and poorest communities. Many small businesses holding on by a shoestring will now be permanently shuttered.

Bottom Line
Construction activity across the country has been suppressed by COVID along with the rest of the economy. A thin silver lining: Nearly 16 percent of construction firms surveyed during the third week of May for the Census Bureau Small Business Pulse Survey reported no pandemic effects on their operations, with almost 26% expecting a return to usual levels in the next three months. Prospects for a rebound look better in the single-family housing market than in commercial real estate or the public sector. The latter will depend on state and local governments receiving aid in order to jumpstart their economies and assuming no second wave of the pandemic.

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Karen.Nye@us.gt.com

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