Residential Construction Supports the Sector

Construction spending came in at a seasonally adjusted, annual rate of $1.49 trillion in December, 1% higher than the upwardly revised November figure. In 2020, construction spending was almost 6% higher than 2019 spending; gains were driven entirely by a sharp upswing in residential spending, which jumped 21% from a year ago. Households that recovered from (or were never affected by) the pandemic invested in new homes and renovations at a staggering pace.

The same cannot be said for businesses or governments, which are still struggling to recover from the blow to their revenues in 2020 and need more certainty on a timeline for herd immunity to place big bets on infrastructure in 2021. The shortfall in budgets for infrastructure spending at the state and local levels will get worse if the new administration cannot get Congress to approve more transfers to the states as part of its $1.9 trillion aid package. Much of the spending we have seen to date was supported by spending on schools to reopen where possible. (See below.)

Private residential construction, up 3.1% on the month, has been on a tear since summer when space-seeking home buyers rushed to snap up properties from a low supply. Builders are attempting to keep up with demand, but rising costs of materials and skilled labor shortages, which increase the time needed to finish a home, have become bottlenecks. (A dearth of housing market construction and remodeling in the years following the financial crisis of 2008-09 left few workers with the training necessary to fill highly skilled jobs for home building.)

The housing market is an outlier in that it is the only sector to experience a complete V-shaped recovery since February when the pandemic first hit. Single and multifamily construction spending is up 23.5% and 17.8%, respectively, compared to a year ago. Low mortgage rates, increased COVID mitigation measures, concerns over new virus variants and the slow pace of vaccinations are forcing people to work from home longer than many hoped; this combination is expected to support a strong housing market in 2021.

Private nonresidential construction fell almost 2% from November levels, with lodging, manufacturing, health care, commercial and religious structures all falling on the month. Monthly gains in transportation, office and power infrastructure spending were not enough to offset the losses. Private nonresidential construction ended the year 10% below 2019 levels.

The American Institute of Architects (AIA) expects nonresidential construction to remain muted in 2021, weighed down by continued losses for hotels, offices, amusement parks and recreation centers. The cancellation of projects began over the spring when the pandemic first hit and is expected to continue into 2021. The AIA expects losses will be recouped in 2022, but that is still more of a hope than a certainty. The hardest hit businesses from the crisis are already deeply indebted, which historically suppresses investment and hiring even after a crisis has passed.

Public spending on construction projects rose 0.5% in December; total public construction spending was 3% higher in 2020 than in 2019. State and local spending, which make up most of the public spending, increased 0.4% in December and 2.7% from a year ago. Higher spending on educational infrastructure (both primary and secondary), public safety (correctional facilities), air transportation, highway and street spending, and sewage and waste disposal all contributed to the gains.

The new administration’s infrastructure plan will be unveiled in greater detail during the State of the Union speech; staff have signaled support for investments in green transportation, renewable energy projects and public school projects (including investment in broadband infrastructure). The $1.9 trillion includes transfers to state and local governments and adds to funding for schools.

Bottom Line
A V-shaped recovery in housing helped propel overall construction spending. Significant infrastructure investment is still badly needed to upgrade and repair roads, bridges and the energy grid.

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