Construction Spending Falls Short

Construction spending inched up 0.1% from May to June, missing expectations, but May and April data were revised up. Private construction spending dominated gains in June. Significant material, land and labor shortages continue to hamper builders’ ability to start or even complete projects; construction employment remained below pre-pandemic levels in June.

Many materials prices shot up during the first half of 2021 but have now begun to soften. However, the recent price declines have been felt only at the wholesale level so far. Shortages, coupled with rising uncertainty from the spread of the Delta variant, will continue to put a damper on construction projects in the near term. Investment in residential and nonresidential buildings could remain a drag on overall growth in the third quarter.

Private residential construction spending grew 1.1% in June. Single-family construction and home improvement drove those gains. Multifamily construction fell during June. Increased demand from the move to second-tier cities and renters being priced out of buying in this market will create more momentum for builders to develop multifamily homes later this year.

Spending on private nonresidential construction slipped for the third month in a row, falling 0.7% from May. Only communications infrastructure and private education construction eked out gains for June. The industries hardest hit by the pandemic, lodging and recreation, remain well below pre-pandemic levels. Architects expect these projects to expand in 2022 when domestic travel and tourism should pick up. The Delta variant threatens to delay much international travel into 2023; vaccination rates remain uneven between the developed and developing worlds.

Office construction is 15% below February 2020 levels. Workers who have been able to work from home these past 17 months are encountering delays in returning to the office. The uncertainty surrounding the Delta variant is pushing major technology firms and large retailers to prolong work-from-home arrangements and start to mandate vaccinations for employees. We do not see office construction recovering until as late as 2023.

Public construction spending, most of which is funded at the state and local levels, fell 1.2% in June, marking the sixth consecutive month of losses. Even with federal support, state and local spending has been slow to increase, even in areas where it is most needed. Investments in upgrading buildings and installing HVAC systems are slow to pick up even when funding is in place.

A $1 trillion, bipartisan infrastructure bill under consideration in the Senate this week could pave the way for much-needed investment in the country’s roads, bridges and buildings. However, the bill faces complications in the House of Representatives where it has been linked to anti-poverty and climate funding. Even when approved, spending by state and local governments takes time as we have seen with COVID-19 relief funds that have barely trickled through.

Bottom Line
The recovery remains uneven as supply chain disruptions and labor shortages constrain builders’ ability to move projects past the planning stages. The rise of the Delta variant will remain the number one risk to the outlook as it affects the return to offices and schools. The economy has been resilient in the face of new waves and variants, but that has been supported by unprecedented levels of federal money. The support is expected to run out in January unless Congress completes infrastructure legislation and other funding initiatives.

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