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Construction Spending Softens Toward Year-end

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Construction spending rose 0.2% in October from September’s upwardly revised pace. Public construction spending led the gains while private construction spending was dragged lower by a drop in residential spending. Higher prices for fuel, plastics and other materials contributed to higher spending. Compared to October of 2020, spending rose 8.6%, driven almost entirely by the residential sector.

Private residential construction spending fell 0.5% in October as single-family, multifamily and renovation projects all declined. Builders have been struggling to keep up with projects paused when wholesale prices started to skyrocket in the spring of this year. Ongoing challenges, including lack of workers and building lots, are hindering builders’ ability to keep up with strong demand from home buyers. Mortgage rates are expected to rise in 2022, cooling demand for housing and allowing builders to catch up.

Private nonresidential construction rose 0.2% in the month; gains were broad-based. The biggest jump in spending occurred in health care and recreation, religious and communications infrastructure. Spending on office construction rose a modest 0.2%; however, the latest news of the omicron variant and the effects it will have on delaying workers’ returns to offices will lead to less investment in this space.

According to one commercial real estate management firm, demand for office space fell in October to the lowest rate since the start of the year, signaling that the shifts we experienced at the start of the pandemic are far from over. The silver lining for builders is that demand is strongest for newly constructed or newly renovated office buildings because they have the latest air ventilation and filtration systems to facilitate safer working conditions.

Public construction spending, most of which occurs at the state and local levels, rose 1.8% in October, the biggest jump since May 2020. All components experienced gains as states are slowly spending their Rescue Plan funds. Less than half of the nearly $200 billion for states has been allocated so far. This type of spending takes time to work its way through the economy.

At the end of November, the administration announced a doubling of softwood lumber tariffs on Canadian lumber imports. This is at the same time that lumber prices are high, while prices for many other building materials are also elevated. The National Association of Home Builders warns that due to significant housing shortages, this decision will increase the prices of newly built homes. To add insult to injury, the province of British Columbia has been experiencing severe floods that are constraining its ability to ship lumber to the U.S.

Bottom Line
Public construction spending, most of which occurs at the state and local levels, rose 1.8% in October, the biggest jump since May 2020. All components experienced gains as states are slowly spending their Rescue Plan funds. Less than half of the nearly $200 billion for states has been allocated so far. This type of spending takes time to work its way through the economy.

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