Construction spending builds on recent gains

Construction spending rose 0.9% in May after being adjusted lower in April. Residential construction spending fueled the bulk of the gains. Spending is captured in nominal terms; therefore, the impacts of prices and projects are combined. Spending is up 2.4% compared to a year ago. According to the producer price index (PPI), inputs to construction fell 5.5% from a year ago in May due to the drop in energy costs. Russia’s invasion of Ukraine in February of last year caused energy prices to spike. Diesel costs are now down 38% while labor costs, as measured by the annual change in average weekly earnings, rose 5.2% in May. Labor costs for construction workers rose faster than overall wages.  

Private residential construction spending popped 2.2% in May, all stemming from strength in single-family construction and home improvements. Single-family construction spending appears to have bottomed out in April and is starting to pick up again as demand for homes remains strong. Builders have been more attuned to the needs of the market compared to homeowners; the use of price cuts and mortgage rate buydowns have helped fuel robust sales for newly built homes. 

Multifamily construction fell flat on the month, but activity remains 20.4% above year-ago levels. With record levels of newly built units coming on line this year, builders have slowed activity; permits are 12% lower than a year ago in May. However, activity remains robust. According to the National Association of Home Builders (NAHB), all regions saw positive multifamily construction growth rates in the first quarter of this year, with the outlying counties of large metro areas experiencing the strongest growth rate at 24.5%. The impacts of hybrid work are here to stay, meaning more of those who can work only a few days a week in the office can look further from city centers for housing. 

Private nonresidential construction spending fell 0.3% in May after 11 consecutive months of growth. Spending remains 20.5% above year-ago levels, fueled by record annual growth in manufacturing infrastructure of 77%. Spending on computer and electrical manufacturing infrastructure has boomed since government and private investments have poured in. Additional funding for nationwide broadband infrastructure is set to increase spending for communications infrastructure next year. 

The boom in clean energy projects, chip plants and data centers is fueling labor shortages all down the supply chain, for everyone from mining engineers to plumbers, electricians and specialty contractors; labor shortages will remain major hurdles for the ramping up of projects in the near term. Additionally, suppliers of necessary equipment are already stretched thin with backlogs rising. Electrical switchgear, transformers and electrical steel are on significant backorder. 

Public construction spending grew 0.1% in May. State and local governments make up the bulk of the spending. The largest component, highway and street infrastructure spending, fell 0.4% in May. The rising instances of extreme weather events will mean more funding will be needed for vital infrastructure, including roads, water and sewage systems, and power grids.