Construction Sector Disappoints

Total construction spending grew a tepid 0.2% in March, below expectations, after losing ground in February. The first quarter ended with the slowest growth rate since late 2019, before the pandemic hit and when prices of materials and labor were much lower. Builders were then able to get more bang for their buck. Now project timelines are growing longer as significant shortages persist.

Spending on nonresidential construction has been negative for four quarters in a row. Residential construction spending remained strong in March since a slew of first-time buyers and many who have been working from home jumped on historically low mortgage rates.

Private residential construction spending grew 1.7% after being virtually flat in February. Single-family construction and home improvements continue to outpace multifamily project spending. Compared to a year ago, private residential spending hit the highest rate in eight years; this is where base effects start to play out. One year ago, many projects came to a standstill as the pandemic was beginning; base effects will be even stronger in April and May. The housing market is now robust with demand outpacing supply. Builders are scrambling to make up for the shortage of existing homes. This summer will again be busy for builders and realtors.

Private nonresidential construction fell at a rate of 0.9% in March, the same pace as February. The pandemic curtailed travel plans and discounted the need for hotels and retail spaces. Those losses could be reversed with mass vaccinations and more travel and service sector reopenings over the spring and summer. The Architecture Billings Index, a 9-12 month leading indicator of nonresidential construction projects, hit the highest reading since 2017 in March. Firms that work in some of the hardest hit sectors, especially leisure and hospitality, are reporting new commissions. Backlogs on projects are growing; it was easier to shut down everything a year ago than it is to reopen now.

Significant supply constraints on raw materials, shortages of labor and containers in the trucking industry, lumber mill bottlenecks and an inability to find workers are causing imbalances some builders have never experienced. Prices go up on supply shortages, which has been the case since last summer when the housing market started to boom. With input costs rising, some builders are passing on costs to customers.

Public construction spending fell 1.5% in March, with both federal, state and local spending down. The largest losses occurred in highway, street and educational infrastructure spending. State and local governments have only begun to receive federal funds to make up for losses incurred during the height of the pandemic. It will take some time for state and local governments to allocate funds once they have received them. We are still short on funds for infrastructure improvements, which the administration is currently seeking.

Bottom Line
Strong activity in the residential sector over the spring and summer will continue to constrain supplies of materials and labor. New demand in the hotel and restaurant industries will only exacerbate the shortages. All price spikes will be carefully monitored by the Federal Reserve but these are expected to be transitory because the bottlenecks are expected to be short-lived. Consumers will resume spending more on services than goods, as they did pre-pandemic, by the end of 2021 and into early 2022.

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