Winter Storms Blocked Construction in February

Construction spending in February hit a seasonally adjusted annual rate of $1.5 trillion, an 0.8% decrease compared to January’s upwardly revised data. Both residential and nonresidential construction spending declined but residential construction remains 21% above year-ago levels, while nonresidential construction is 6.1% below February 2020 spending.

Private residential construction edged lower during the month as a surge in material costs and severe winter weather delayed activity in the largest construction region, the South. Multifamily construction fell by 1.4%, while single-family projects basically flatlined. Both categories are still up at a double-digit rate from a year ago before the onset of pandemic restrictions. An acute shortage of homes, particularly for older millennials who waited to buy a first home, is keeping builders busy.

Private, nonresidential construction fell 1%. Losses were broad-based and remain well below year-ago levels. That was despite the rebound in manufacturing activity we have seen as consumers shifted their spending from services to goods.

A private industry measure, the Architecture Billings Index, hit positive territory for the first time in a year in February, driven primarily by more activity in the commercial and industrial sectors, which include offices, restaurants, hotels and retail. Additional support from the latest government aid bill, along with an increased pace of vaccinations, should help the index to remain in positive territory for the year as more high-contact businesses are able to reopen and domestic leisure travel returns to normal levels. However, spikes in many input costs, shipping delays and uneven reopenings across states could result in an uneven recovery in the nonresidential construction sector.

IHS Markit’s Engineering and Construction Cost Index rose for the fifth month in a row in March, reflecting increases in all prices, including labor. February’s employment data showed construction actually fell by 61,000 in the month, however, job openings in the January JOLTS survey show construction to have 309,000 unfilled positions, the highest since October of 2019. Finding workers is a big hurdle, especially as more infrastructure projects are created when the economy reopens more significantly.

Public construction spending fell by 1.7% in February as both federal and state and local spending declined before the latest federal relief bill was passed. The bill provides much-needed aid to state and local governments, for investment in health care, public education, employment and broadband.

The administration unveiled its $2 trillion infrastructure spending plan, with hopes that it will pass the House by July 4th. The plan is spread out over 8 years. There are significant investments earmarked for roads and bridges ($115 billion), electric vehicle charging networks and incentives ($174 billion), railways ($80 billion), airports ($25 billion), broadband connectivity ($100 billion), lead pipe elimination ($45 billion), clean energy ($100 billion), affordable housing ($213 billion) and investments in buildings and manufacturing. Addressing the need for infrastructure to be more climate-resilient, especially in vulnerable coastal communities, is an urgent matter for the administration. The ramp up of government spending takes time.

Bottom Line

The U.S. hasn’t seen significant federal investment in over 60 years since the interstate highway system was built. Big boosts from the rescue plan and the recovery act will help those hardest hit by the pandemic and recession to get to the other side in better shape. We expect the overall economy to regain its footing back to the pre-COVID trajectory later this year. While infrastructure investment will pick up, supply constraints, rising prices and worker shortages could delay projects.