Construction Spending Slowed in September

Construction spending dropped 0.5% in September, the first monthly decline in seven months. All components of spending fell as material prices began to cool after hitting record highs over the summer. Supply chain disruptions continued to delay projects. Spending was still up 7.9% from a year ago, driven entirely by the private, residential sector. Demand for housing will remain strong into next year; however, material and labor shortages are forming headwinds for builders trying to work their way through backlogs.

Private residential construction spending dipped 0.5% in September as both single and multifamily housing construction declined. Prices for materials such as lumber and plywood fell during the month; however, energy and other material prices continued to climb. Spending in this category was 19.3% above year-ago levels but the pace has been slowing since July. With building permits softening in September, residential investment will remain a drag on growth into next year.

Private, nonresidential construction fell 0.6% in September and remains below precrisis levels. The Delta variant curtailed leisure activities and return-to-office plans in late summer. Lodging, office, education, religious, amusement and recreation, transportation and communications infrastructure spending all remain below last year’s levels. The largest component of nonresidential private construction, power, fell during the month.

According to the U.S. Chamber of Commerce quarterly construction index, 92% of contractors experienced worker shortages, putting a crimp on the ability to meet project deadlines. Additionally, 93% of contractors are facing one or more material shortages, while rising costs are affecting nearly everyone. At the latest G-20 meetings, the U.S. and Europe have come to a resolution on reducing steel and aluminum tariffs, which should provide some reprieve to the steel shortages experienced by contractors last quarter.

Public construction spending, most of which is conducted at the state and local levels, fell 0.7% in the month; losses were broad-based. The second-largest component, educational infrastructure, posted a 0.9% rise in spending in the month as schools remained open to in-person learning. The latest infrastructure bill being negotiated in Congress still has some spending on clean energy and climate investments at around $555 billion, with housing allocated $150 billion. That should provide a boost to public spending over the next few years, but government allocations are always slow to get out the door.

Bottom Line
Supply chain concerns have not yet eased, even with two ports now operating 24/7. The reduction in steel and aluminum tariffs from the EU will help with price pressures; however, high energy costs, shipping delays and labor shortages will limit construction activity into 2022.

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