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Housing Supports Construction Spending

RFP
Construction spending during the month of July came in at a seasonally adjusted annual rate of $1.36 trillion, a small uptick from June’s revised figures, reversing four months of straight losses. Spending was still down compared to one year ago. Public construction spending drove the losses with state and local government budgets severely squeezed by the pandemic. Federal relief is still being debated.

Private construction spending was up 0.6% in July but still about $75 billion below pre-crisis levels. Private residential construction spending, up 2.1% from last month, was buoyed by both single- and multifamily spending since the housing market has been on a tear since the spring. About one in five people surveyed by Pew has either moved or knows someone who moved this summer. Strong activity in both the single- and multifamily markets (except in large, expensive cities like New York and San Francisco) can offset some of the losses felt in the other sectors as the uncertainty of the pandemic rages on. Second-tier cities, such as Phoenix, Charlotte and Nashville, are seeing strong demand for their rental markets.

The downside risk in the housing market is in rent collection, especially in the next few months. According to the National Multifamily Housing Council, 92.1% of apartment rent was paid by the last week of August, about 2% lower than the same period last year. The support provided by enhanced unemployment benefits in the CARES Act lapsed at the end of July so property owners are bracing for a potential wave of missed payments from tenants; smaller replacement funds have yet to kick in.

Nonresidential private construction, down 1% for July, posted broad-based losses from lodging, office, commercial, health care and educational infrastructure projects being halted or canceled. Travel and tourism are still a shadow of their former profiles as many choose to drive and stay with friends or relatives or in Airbnb this summer. Airports, hotels and amusement parks reported some activity but are still operating in the red.

Public construction spending, comprised mostly of state and local spending, fell 1.3% in July. Spending on education infrastructure fell by 3% due to losses in primary and secondary school spending. The move to online for some of the biggest school districts in the country has shifted spending toward technology. This will be reflected in employment losses for August. What is a traditionally busy month for back-to-school has been flipped upside down as local governments and communities grapple with the risk of COVID-19 for their youngest residents.

In college towns, a move to a hybrid or strictly online model has not deterred some students from returning to campuses and/or sharing homes to create school pods. We are also seeing doubling up in the broader rental market as wage and job losses affect people’s ability to afford their own place.

Bottom Line
Construction, like other sectors, suffered significant losses during the spring and has yet to rebound to pre-crisis levels. The strong momentum from the residential market will help keep a floor under the sector until a vaccine is available. Increased construction activity over the summer will contribute to GDP growth in the third quarter.

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Karen Nye
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