Uneven construction in September

November 1, 2023

Construction spending edged up 0.4% in September while August spending data were revised higher. Spending is captured in nominal terms, which means both the change in prices and the change in activity impact spending in the month. Compared to a year ago, construction spending is up 8.7% while the producer price index (PPI) for inputs to construction industries is up 0.5% in September. Every single category except single-family home construction is higher than a year ago.

Private residential construction spending rose 0.6% in September, driven by a 1.3% jump in single-family home construction. Multifamily construction spending slumped 0.1% in September. Builders have pivoted to building single-family homes as a record backlog of apartments is coming on line next year. Permits for single-family homes grew 1.6% while multifamily permits dropped by 14.3%. Builders have focused on incentives such as mortgage rate buydowns to lure buyers; incentives work, as newly built home sales jumped 12.3%.

As mortgage rates climbed toward 8% at the end of October, builders offered about two percentage points off, bringing rates to about six percent for buyers. This is significantly less than the four to five percentage points of cuts builders were offering in the 1980s. Affordability in housing has dropped to the lowest level since the mid-1980s; the only period worse was the early 1980s, when mortgage rates soared well into the double digits.

Private nonresidential construction spending rose 0.1% in the month with higher spending on commercial and power infrastructure. The Inflation Reduction Act has incented investments in renewables but high interest rates are beginning to delay many new projects. Manufacturing construction fell slightly in the month but is 62.5% higher than a year ago. The burst in activity began in late 2021 as incentives from federal legislation pushed investment into chip and battery plants. Inflation-adjusted investment in manufacturing grew at a 19% annualized pace in the third quarter.

Public construction spending grew 0.4% in the month with stronger educational infrastructure spending. Highway and street construction, the largest category, fell slightly during the month. State and local construction spending, which take up the bulk of public spending, jumped 0.9% in the month. Governments are on the clock to spend federal funds allocated for infrastructure; the fiscal year ended at the end of September.