Construction spending rose in autumn

December 2, 2024

Construction spending rose 0.4% in October after September estimates were revised higher. That translates to a 5% year-on-year increase in spending, not inflation-adjusted. Over the same period, input costs for construction industries fell 0.2%, driven largely by a decline in energy costs. Certain material costs, like copper, aluminum and cement are much higher than a year ago. Electrical equipment is still in short supply, while labor shortages remain acute.

Private residential construction jumped 1.5% in the month with both single-family and multifamily construction posting gains. Single-family construction, growing at 0.8%, recorded the highest monthly increase since February. The recent uptick in mortgage rates cut demand and moved the housing market recovery to later in 2025. Larger builders are better equipped to meet sidelined demand by offering mortgage rate buydowns and building smaller homes. The high costs of labor, land, insurance, taxes and materials all erect hurdles to construction, even when interest rates fall.

Multifamily construction recorded its first monthly rise since November last year. Builders have pivoted away from multifamily as they work through record backlogs. Nearly two-thirds of states recorded fewer multifamily permits last month. Demand for apartments remains strong, as evidenced by high absorption rates and strong household formation. The supply picture appears less rosy, with similar hurdles to ramping up in the multifamily space. Permitting and new construction will remain weak into 2025 as rents continue to soften. Construction will begin to pick up by the of 2025 as rents start to rise when less supply comes on line.

Private nonresidential construction fell 0.3% in October on lower commercial, lodging, healthcare, educational and amusement/recreation construction spending. Data centers gained 3.2%, hitting another record high. December will mark two years since generative AI technologies were first announced; since then, the investment in data centers and the power plants that fuel them has grown exponentially. Construction of manufacturing plants for chips and batteries is down from a peak in May but remains 17.6% higher than a year ago and six times higher than November 2021 when the Infrastructure Investment and Jobs Act (IIJA) was passed. Additional support from CHIPS and IRA in 2022 accelerated spending in this category. More investment is expected to flow into manufacturing semiconductors and other critical materials domestically in the coming years.

Public construction spending slumped 0.5% in the month as the largest categories, highway and street construction and education all recorded losses. The bulk of spending occurs at the state and local levels, exactly where the losses occurred. On election day, voters approved $41.4 billion in new and renewed funding for roads, bridges and transit infrastructure on state and local ballots. Power infrastructure spending declined 1.5% but is still 2.9% higher than a year ago. More investment is pouring into electrical infrastructure as data centers and manufacturing facilities have significant power demands. The power category includes nuclear power plants and oil and gas facilities.