Construction spending flatlined in August, missing expectations. Losses in private, nonresidential construction spending offset gains in private residential and public construction spending. Compared to a year ago, total construction spending is still up almost 9%, buoyed by increased residential activity and large material price increases. Builders continue to struggle to find enough workers and land while facing delays on materials needed for construction. Although prices for lumber have come off their highs, other materials like steel have continued to surprise with price increases.
Manufacturers are focusing on mass-producing the most in-demand materials; therefore, any niche product that builders may need comes with significant delays and price appreciation. The producer price index (PPI) for material and service inputs to construction industries is up over 20% compared to a year ago.
Private residential construction has been strong since the pandemic began, with builders unable to keep up with demand from home buyers and renovators. Annual construction spending has held to double digit gains since July of 2020. Demand has been softening from those still looking to buy, but bidding wars and record price hikes have sidelined many would-be buyers. Those looking to move up from their first home, or looking for a vacation home, are well positioned to participate in the market; home equity has grown by over three trillion dollars since the pandemic began. Some of those who are looking for a first home are being forced to rent for longer. This has kept builders in the multifamily construction sector busy, especially in the South where many have moved during the pandemic. Across the country, asking rents were up more than 10% in August according to one analysis.
Private nonresidential construction fell 1% last month as the Delta variant paused vacation plans and the return to offices for many. Lodging, health care, education, manufacturing and power infrastructure construction spending all fell. According to one index measuring momentum in the nonresidential construction sector, the silver lining is that data centers, education and warehouse projects are gaining steam and will help support activity next year. The shift to online shopping has increased the need for more warehouse space; some storage has shifted to freight containers as workers sort backlogs.
Public construction spending grew 0.5% in August, marking only the second month of growth so far this year. Federal spending has been a drag on growth, as support from the earlier COVID rescue money peters out. Federal construction spending fell 4.6% in August, while state and local (the largest portion of all public construction spending) grew 0.8% in the month. The largest component, education infrastructure, reversed six straight months of losses and grew 1.2% as students returned to in-person schooling. Of the $130 billion set aside for state and local governments from the American Rescue Plan, it looks like up to half may have been distributed in May but little of that has been committed by state and local governments so far. This signals that politicians are not in a rush to spend until they see what additional funding they may receive in the infrastructure bill currently being negotiated in Congress. More information on how governments plan to spend the money should be available in October; however, the focus will be more on revenue replacement and community support, rather than infrastructure projects such as broadband, water and sewer. Those will fall into a larger spending bill.
Increased prices and lack of available labor and land are hampering builders’ ability to keep up with strong demand in the residential construction sector, while the uneven recovery across the world is adding pressures to supply chains and increasing wait times for materials. Hurricane Ida caused plants in Louisiana to go offline; these types of disruptions are nothing new, however, they are compounded as we are facing a global pandemic. We expect some pressures to ease by the middle of next year, barring another outbreak or a new variant
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