Construction Spending Lags Expectations

Construction spending missed expectations for April, growing just 0.2% from March’s upwardly revised pace. Residential construction spending continued to ramp up while nonresidential fell for the fifth month in a row. Compared to a year ago, spending is up almost 10%, but the comparison is amplified by the shutting down of the economy during April 2020. Compared to February 2020, before the pandemic took hold, construction spending is up 5.8%.

Private residential construction expanded 1% during the month, buoyed by higher spending on single- and multifamily projects. Residential spending is 23% above pre-pandemic levels. Single-family construction has been boosted by strong housing demand. Builders face increasing challenges to satisfying that demand, from rising input costs and to a shortage of labor and land. Multifamily construction, while less robust than single-family, increased for 12 consecutive months. Home improvements eked out small gains but the rising costs of lumber and other materials, along with the return to travel and service spending, will incent homeowners to switch spending away from home projects this summer.

Many renters have been protected by eviction moratoriums, but those are expected to expire at the end of June. The $45 billion in federal aid that has been allocated to help renters and landlords has just started to be disbursed.

Private nonresidential construction, down 0.5% in April, was upwardly revised for February and March as more manufacturing, commercial, health care and office projects came on line. Construction on power infrastructure (pipelines and oil and gas structures) fell 1.8% in April; the sector makes up almost a quarter of overall private, nonresidential spending. Spending on warehouse construction has been booming with the shift to e-commerce and the need to expand vaccine storage and distribution capacity, but it is showing signs of slowing. According to the Dodge Momentum Index, fewer warehousing projects are now in their planning stages, while health care and laboratory projects are being ramped up; that shift will be seen in spending late in 2021. Office construction grew in April as more people working from home are becoming vaccinated and returning to their offices. Nonresidential construction is off 9% from pre-pandemic levels.

Public construction spending, most of which is state and local government-funded projects, fell 0.6% in April, marking four straight months of losses. While state and local governments were allocated federal support from the last COVID aid bill, government money takes time to reach its target.

Bottom Line
Material price pressures are hampering the construction sector and builders’ ability to meet strong residential demand plus the return of nonresidential projects. Supply shortages, which contribute to the price spikes, are expected to ease but not until later this year.

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