Single-Family Homes Boost Construction

Construction spending rose 0.5% in February following January figures that were revised higher. Private sector spending drove all of the gains. Higher prices for materials, lack of workers and delays to projects have been plaguing the construction industry since last year. Construction-related, annual inflation growth hit a record high in February. Supply chain bottlenecks remain a concern as the war in Ukraine continues and China keeps locking down major cities and ports for each COVID outbreak; bottlenecks are not expected to ease this year.

Private residential construction spending rose 1.1% in February as single-family construction remains on a tear. By one estimate, we are still short about four million homes necessary to keep up with population growth and household formation. Furthermore, we need to add 740,000 new construction workers per year to keep up with industry growth and retirements; the median age of a construction worker is 41 years old. In 2021, construction sector payrolls only grew by 186,000. Immigration is key and has been sorely lacking for years.

Multifamily construction was flat on the month but still 7.8% higher than a year ago. Demand for renting will only continue to increase as mortgage rates rise. Some regions are already experiencing record-low vacancies for apartments.

Private nonresidential construction spending edged up slightly by 0.2% in the month as the tail end of the Omicron wave delayed plans for returning to offices and in-person activities. Office, health care, commercial and religious infrastructure spending all fell in the month. The good news is that spending on hotels and transportation infrastructure rose in anticipation of a more robust travel and tourism season this spring and summer.

Public construction spending fell as federal, state and local governments pulled back on spending. Many schools moved back online during the Omicron wave. The infrastructure funds released to state and local governments will take time to be spent and work their way through the economy. State and local investments will boost growth in 2022 while federal spending will remain a drag on growth.

Bottom Line
The construction industry is feeling the pinch with record-high prices for many materials and energy inputs as geopolitical uncertainty and COVID waves create headwinds. China plays a bigger role in the global supply network than it did pre-pandemic. Construction activity remains robust, especially in the residential sector, as builders work their way through backlogs. Rising mortgage rates will help slow demand for housing and cool prices for home buyers; however, demographic tailwinds and the lack of housing in the country’s most coveted markets will keep builders busy this year.

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