Mixed Picture for Construction

Construction spending flatlined in March after being revised higher for both February and January. Spending was 11.7% higher than a year ago, with inflation contributing to the increase in spending. The war in Ukraine and China’s lockdowns are adding fuel to the inflation fire, as additional, steep price increases were announced in recent weeks. Prices for fuels, metals and lumber are soaring again. The concern for builders in the coming months won’t only be high prices, but significant shipping delays for materials.

According to the Census Small Business Pulse Survey, the construction sector has been suffering greater domestic and foreign supplier delays than the national average this year. Over 60% of construction businesses have experienced domestic delays in 2022, compared to about 40% of businesses at a national level. This has implications for companies aiming to onshore or nearshore operations as a way to hedge against foreign delays; supply chain networks are too intertwined.

Private residential construction grew 1% in March from February levels as builders worked to catch up on single-family projects. Multifamily and home improvement projects fell during the month. Builders will have more multifamily projects in the pipeline as mortgage rates hit 5% in early April and will remain above the pandemic lows we saw. Higher rates, coupled with record-high home prices, are pushing many would-be buyers into the rental market. The most popular regions in the country are experiencing record-low apartment vacancy rates. It takes significantly longer to build an apartment building than a house; therefore, the rising rental costs due to low inventory will remain a concern this year.

Private nonresidential construction fell 1.2% in March, the largest one-month drop in 16 months. Commercial, health care, educational, religious, recreation, power and manufacturing infrastructure spending all lost ground during the month. Overall business investment was strong in the first quarter; however, a slowdown in spending signals slower than expected growth in the second quarter.

The nonresidential new construction input costs from the producer price index (PPI) rose 2.7% in March from February levels and 21.5% from a year ago. This is a faster monthly and annual growth rate than the overall bid prices for construction, which means producers are expected to keep passing along price increases to builders.

Public construction spending, most of which is done at the state and local levels, fell 0.3% in March as governments are yet to spend the pandemic relief funds. Funding has been passed for infrastructure, which takes time to ramp up. State and local governments will have to compete with the private sector for workers, as a labor shortage will create delays.

Bottom Line
Inflation is a concern for builders and producers as headwinds from an uneven global recovery mount. The Fed is poised to increase rates by 50 basis points at this week’s meeting in its journey to rein in inflation. The domestic economy held up well in the first quarter, despite the negative headline. We are not in a recession yet but risks for later this year are clearly rising.

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