Construction Spending Picks Up

Construction spending came in at a seasonally adjusted, annualized rate of $1.44 trillion in October, a 1.3% increase over September’s upwardly revised figures. Construction spending is now 3.7% above year-ago levels. Private, nonresidential construction continues to lag; growth in October was entirely due to strong, private residential and federal construction spending. The K-shaped recovery can be seen in the construction sector as well; residential spending is now 14.5% above year-ago levels while nonresidential is 8% below.

Private residential construction, which has been expanding since the pandemic began, grew almost 3% as builders struggled to keep up with demand. Supply remains tight, hitting a historic low of less than three months’ supply. Materials and labor shortages have been holding back larger gains. Home improvements, which were rising significantly with people staying at home and modifying their home spaces for work, actually contracted during October. That was partially due to material shortages and cost increases, which have been identified as major concerns for contractors.

By contrast, spending for private, nonresidential construction dropped for the fourth month in a row. Losses occurred in every category of commercial and industrial infrastructure except for transportation and communication. Some of the hardest-hit areas of the economy like hotels, schools, religious activities and amusement and recreation parks show construction spending below year-ago levels.

Public construction, nine-tenths of which is state and local spending, edged up 1% in October after falling for four straight months. State and local spending alone was virtually flat, while federal increased by double digits in almost all areas. The biggest gains in federal spending affected public safety, transportation and power infrastructure; public safety spending increased 2.5 times over last year.

State and local construction spending in October was virtually flat but ended four straight months of losses stemming from huge budget hits related to COVID. Spending on health care structures, educational buildings, power, highways and streets and conservation and development all increased during October. However, growth in investment can be short-lived. State and local governments stand to lose about $70-74 billion in fiscal year 2020 due to COVID-19 revenue shortfalls and spikes in costs, as estimated by Moody’s Analytics.

Bottom Line
The latest surge in COVID-19 infections combined with the lack of additional fiscal support from Congress will hinder recovery prospects. Risks of a double-dip recession are mounting.

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