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Construction Expands Despite Shortages

RFP
Construction spending surged 1.3% in January to an annual rate of $1.68 trillion; all components grew during the month. December spending was revised higher. Higher costs have led to higher spending as builders continue to struggle with material delays and labor shortages. Higher shipping costs are not expected to abate anytime soon. Inflation in the cost of materials necessary for construction, such as fuel and metals, will continue to rise in 2022 since Russia’s invasion of Ukraine.

Private residential spending rose 1.3% in January with all of those gains coming from single-family home construction and renovations. Builders have been working through backlogs since housing demand remained strong at the end of 2021 and is now providing a pipeline of projects. The concern is that rising mortgage rates, coupled with record-high prices for homes across much of the country, will sideline even more would-be home buyers and slow demand through the year. Less buying means more renting; we expect multifamily projects to continue to see investments pouring in.

Private nonresidential construction spending surged 1.8% in January, driven entirely by infrastructure spending on transportation, power and manufacturing. COVID-sensitive industries, such as hotels, offices and schools, declined for the month as the Omicron wave delayed plans and sent millions of workers home sick. Monthly business conditions remained in positive territory for nonresidential construction contracts as backlogs for new projects expanded.

Regionally, activity is strongest in the South. This will provide momentum for nonresidential spending in 2022; however, headwinds from worker shortages and material shipping delays remain.

Public construction spending ticked up 0.6% in January; federal spending offset the drop in state and local spending. State and local governments make up the bulk of all public spending; these spending levels have been falling for three consecutive months. Due to increased property taxes and federal government transfers, state and local governments are flush with cash and have the ability to boost infrastructure spending this year. However, this type of spending takes time to work its way through the economy, especially when major hurdles, from finding workers to getting materials, are still in play.

Bottom Line
The construction sector will continue to face higher prices and worker shortages as more projects come on line. Russia’s invasion of Ukraine and the subsequent sanctions will drive up energy prices and add to supply chain bottlenecks and shipping times. We still expect the Federal Reserve to begin raising interest rates at its March meeting, as it is now chasing inflationary pressures.

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Karen Nye
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Karen.Nye@us.gt.com

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