Construction Is Slowing

Construction spending in April rose 0.2% to a pace of $1.74 trillion, missing expectations. March spending was revised higher. Spending rose at the slowest pace since July 2021, even as inflation for input prices remains high. Input prices remain above what contractors are bidding, especially for fuel, steel and aluminum.

Private residential construction rose 0.9% in April, the only type of construction that showed gains in the month. The housing market shows signs of cooling, with sales of new and existing homes softening from their pandemic highs. However, prices remain at record highs, as the inventory of homes for sale is slow to come online. Builders have been busy working through backlogs but are starting to see future sales activity slow.

Mortgage rates have risen at the fastest pace on record since April and have already sidelined first-time buyers. The silver lining is that apartment vacancies remain low, especially in the hottest markets in the country; multifamily building is expected to remain strong in these markets.

Private nonresidential construction spending slipped for the second month. Losses were broad-based and included declines in commercial, health care, religious, transportation and power infrastructure. Amazon recently announced it is looking to sublease some of its excess warehouse space.

Consumers have been shifting their spending from goods back toward services as travel and tourism rebound from pandemic-induced losses. Big-box discounters already suffered an unwanted rise in inventories as spending shifted away from home goods and toward luggage. Those gains may be short-lived, given disruptions triggered by the war in Ukraine and the lockdowns in China. Many retailers are worried they will not be able to fill shelves as much as they would like to for the back-to-school and upcoming holiday seasons. Halloween is one of the largest spending holidays next to Christmas.

Public construction spending fell 0.7% in April. State and local governments have been slow to spend the windfall gains in tax revenues and pandemic aid they received last year. Spending on highways and streets fell for the fourth consecutive month; the infrastructure bill is still ramping up.

We could see more commercial real estate activity over the summer as workers continue to return to offices. According to the American Institute of Architects, reconstruction projects exceeded new construction for the first time in 20 years. As the pandemic turns endemic, the need for better air filtration will increase, while the ongoing threats of climate change mean that buildings will need to be more resilient to extreme weather events.

Bottom Line
Construction activity remained tepid in April even after adjusting for upward revisions to March. Rising interest rates will add insult to injury with the exception of commercial remodeling projects. The big boost from the infrastructure bill is not likely to show up as a major boost to activity until late 2023/early 2024.

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