Construction spending increased 1.4% in August to a seasonally adjusted annual rate of $1.4 trillion, doubling expectations. For the third month in a row, residential construction led the gains with 3.7% growth. Nonresidential construction slipped just 0.1% during August. Total construction spending has gained 4.2% from 2019 levels during the first eight months of this year.
Private residential construction is booming as buyers flock to the housing market to take advantage of historically low mortgage rates. In August, pending sales of existing homes hit a record high of 8.8%, while home prices are accelerating an average of 4.8% in the last year according to the S&P CoreLogic Case-Shiller National Home Price index. While existing and new home sales have hit a 14-year high, the inventory on hand is half what is needed. Builders will have to increase construction in order to match the demand. The single-family home market will be the source of gains; investment in multifamily may slow as more renters are unable to afford rent and landlords are unable to fill vacancies.
The commercial construction sector was hit early in the recession as the drop in travel and working from offices caused pauses and cancellations in commercial contracts. Some bright spots, such as manufacturing and warehousing infrastructure, have held up fairly well as construction activity resumed around the country in the late spring.
According to the Dodge Momentum Index, which measures the momentum in planning for nonresidential building projects, August recorded the second consecutive month of increased activity after declines in the spring. Most of the momentum is due to planning for warehouse and office projects. Institutional construction, which includes construction by state and local governments, has been on the decline for five straight months without touching bottom; state and local government budgets took large hits due to COVID spending and revenue losses. More federal support, which is stalled in Washington, could revive state and local spending.
Public construction spending, of which the largest portion is state and local spending, edged higher during August as essential services like water infrastructure, highways and streets and educational building led gains. State and local spending on health care and public safety declined for the second month in a row; many state and local fiscal years started on July 1 after cuts had begun.
Residential construction will help the third quarter regain some ground lost to COVID. Those gains alone will not be enough to get back to our previous peak by year-end.
Copyright © 2020 Diane Swonk – All rights reserved. The information provided herein is believed to be obtained from sources deemed to be accurate, timely and reliable. However, no assurance is given in that respect. The reader should not rely on this information in making economic, financial, investment or any other decisions. This communication does not constitute an offer or solicitation, or solicitation of any offer to buy or sell any security, investment or other product. Likewise, this communication serves to provide certain opinions on current market conditions, economic policy or trends and is not a recommendation to engage in, or refrain from engaging, in a particular course of action.