Construction Spending Begins to Fade

Construction spending declined by 2.1% in May from April, coming in at a seasonally adjusted annual rate of $1.36 trillion. Compared to a year ago, construction spending was flat. Looking closer, the combined spending for the first five months of 2020 rose 5.7%, exceeding the same period in 2019; that’s a sign that construction activity was moving forward even during the lockdowns.

An important distinction to make is that the South, the largest construction region in the country, was not under strict lockdown when the Northeast and Midwest suffered the worst from the coronavirus. Now that it is spreading in the South and West, we could see a damper placed on construction activity for the next few months. The construction industry is better positioned than some to ensure safe and socially distant working conditions, but projects could be delayed or canceled as investment starts to dry up in order to preserve cash.

Private construction, making up almost three quarters of total spending, reached $1 trillion in May, 3.3% below April. Both residential and commercial construction incurred losses in May, indicating that projects delayed or canceled in March and April were slow to ramp up again.

The housing market has fared far better than the commercial construction market during the lockdowns. Supported by the rise in mortgage applications and momentum from rock-bottom rates, the construction industry will continue building more houses to fill the significant shortages in supply. The risk is that extensions to unemployment insurance (UI) benefits and cuts in wages could cause sharp defaults in apartment rents along with retail rents. Many people who were forced to skip rent payments in April were able to catch up once their enhanced benefits finally hit their checking accounts in May and June. Those benefits will expire on July 31 unless Congress moves to extend them in some form.

A quarterly survey published by the U.S. Chamber of Commerce captured positive sentiment in the construction industry during the second quarter: One third of contractors surveyed plan to hire more workers, while almost half expect no workforce reductions. Over 80% of respondents believe their revenues will either increase or stay the same over the next year.

Public construction, the bulk of which is spending by state and local governments, increased 1.2% in May. State and local government spending was mostly concentrated on educational structures, transportation and highways and streets. The funding for state and local projects is being cut in response to the shortfall in revenues associated with COVID-19. Those losses will show up over the summer and during the fourth quarter unless Congress moves to plug the holes left by COVID-19 at the state and local levels. The price tag just went up, given the resurgence in cases across more than half of the states.

Bottom Line
Just as we are experiencing an alarming extension of the first wave of the pandemic, we are beginning to see irreversible damage done to sectors such as retail, mining (oil and gas) and office space. The jury is still out on whether the shift from urban to suburban homes will be transitory. Tourism and travel may take the longest to recover; airport projects from Orlando to San Francisco have been canceled or downsized in order to match reduced demand as a result of the pandemic. There was a temporary sigh of relief when hotspots like New York and New Jersey were able to flatten the curve on infections and many parts of the economy showed signs of life in June. The story looks different for July. Health experts warn that the U.S. is on a path to see as many as 100,000 cases per day if masks and social distancing are not widely adopted.

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