Construction Spending Firm as 2021 Begins

Construction spending rose 1.7% in January, reaching a seasonally adjusted annual rate of $1.5 trillion. That was stronger than December and more than double expectations. Both private residential and nonresidential construction spending increased; nonresidential private construction finally ended six months of losses. Public construction spending also rose 1.7% compared to the previous month. Overall construction spending expanded by 5.8% compared to one year ago, but the gap between residential and nonresidential remains large; the unevenness of the economic recovery can be seen in construction.

Private residential construction has been on a tear for nearly a year; severely restricted inventory has exacerbated the strong demand. Significant delays due to material and labor shortages are hampering builders. Even so, residential construction spending jumped 21% compared to one year ago, partly reflecting the spike in materials costs. Supplier delays are holding back construction timelines; many projects are already booking into next year. Home improvement projects have also expanded with so many working from home.

Private nonresidential construction spending added 0.4% in January, driven mostly by gains in lodging, health care and manufacturing. Nonresidential construction still lags year-ago levels by more than 10%; the pandemic hit plans for hotels, offices and downtown cores. We expect to see new investment in existing buildings when offices begin to reopen in the late summer or early fall; everything from air filtration systems to floor plans will need to be reconfigured for post-COVID office space.

Public construction spending increased 1.7% in January. The biggest portion of spending is done by state and local governments, which rose 1.3% for the month. State and local highway and street construction increased while most components declined last month. Federal spending increased nearly 7% but from a smaller base.

The Dodge Momentum Index warned that public construction planning has fallen to the lowest level in almost 20 years; state and local governments rushed to spend their federal aid at the end of 2020. They now face growing budget deficits, which we expect to hinder spending later this year. We have yet to hear any details from the new administration about infrastructure spending plans, which would boost public spending on construction.

Bottom Line
Construction spending started off 2021 on a high note with all components expanding during the first month. Those gains will likely ebb in February when we will see the impact from the severe winter weather that hit the nation’s largest region for construction, the South.

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