Slowest pace in two years for construction spending

Construction spending dropped 0.1% in February while January spending was significantly revised to the upside. Spending is recorded in nominal dollars, meaning a movement in both prices and activity affect spending in the month. Residential and public construction spending drove the losses during the month. Compared to a year ago, spending is only up 5.2%, the slowest pace in two years. Temperatures in January and February were warmer than usual across the country, while the annual price index for final demand for construction rose 16.2% in February. The expectation was for activity to be even stronger.

Private residential spending was down for the ninth consecutive month in February, falling 0.6%. A drop in single-family home construction of 1.8% was partially offset by a 1.4% rise in multifamily spending. Home improvements were flat on the month. Single-family construction is expected to remain muted for the first half of the year, as permits for building in February were down 35% compared to a year ago. Demand could soon pick up, as a lack of existing housing stock motivates eligible buyers to look for newly built housing instead. As the traditionally busy home-buying season is around the corner, some regions of the country, especially the South, are expected to see robust activity.

Multifamily construction is still strong, but the expectation for the rest of the year is for activity to cool as more supply comes on line. The number of units currently under construction is at a multi-decade high. Rents have already started cooling, while financing of projects is becoming more difficult. A survey done by the National Multifamily Housing Council shows that financing availability is now one of the top concerns for multifamily builders during the first quarter, replacing supply chain bottlenecks and labor shortages back in 2022. Permits are up 17% compared to a year ago, but as builders see some projects as less economically viable, more of the activity will shift to other projects. 

Private nonresidential construction added 0.7% in February with two of the largest components, manufacturing and power infrastructure, driving the gains. Increased investment from federal funding will contribute to gains in these components this year. Commercial construction, rounding out the three top components, fell 0.6% in February; losses in retail spending are to blame; the pandemic accelerated the trend to online shopping. The next shoe to drop will be in office space.

Public construction spending was down 0.2%; most of that spending occurs at the state and local levels, which were down 0.3%, while federal spending was up 1% in the month. About a third of public spending goes to highways and streets, which will see a pickup in spending as we enter the busier spring and summer roadwork seasons; the still-high costs of cement and asphalt will help prop up spending.