Construction Spending Rises More Than Expected in July

Construction spending rose 0.7 percent in July, ahead of the consensus estimate. Previous months’ data were upwardly revised, which will add to second quarter real GDP, all things equal. 

Better Economic Conditions Help Lift Outlays

Starting the third quarter off in the right direction, total construction spending rose 0.7 percent in July to a seasonally adjusted annual rate of $1,083.4 billion, marking the eighth month of positive outlays. Construction spending usually lags in the recovery, but the recent turnaround suggests that companies that were taking a “wait-and-see” approach to putting money to work on long-term projects are now a bit more hopeful on the U.S. economic outlook.

Private construction spending rose 1.3 percent during the month and is up almost 17 percent over the past year. Over the past three months, private outlays have risen at an average annualized pace of 26.5 percent, which suggests the underlying trend is solid. Public outlays fell during the month with broad-based declines across residential and nonresidential.

Residential Outlays Post Another Gain

Single-family outlays are riding the wave of rising household formations and are now up almost 16 percent from a year earlier. The increase in single-family construction spending during the month is consistent with the strong gain in July housing starts and builder optimism. Overall gains in the value of private residential put-in-place will once again boost real GDP growth through residential investment.

The trend in multifamily and home improvements is also encouraging. Although the apartment market is likely at a “mature” phase of the real estate cycle, evidenced by the low vacancy rate and peak effective rent, the sector appears to have a little more room to run, albeit at a slower pace. The volatile multifamily component posted a negative reading in July, but has risen at more than a 20 percent annual rate over the past three months. Home improvements are also seeing a little luster as many homeowners that refinanced their home are settling in to make needed renovations.

Nonresidential Outlays Gaining Momentum

Following a negative print in June, private nonresidential construction spending rose 1.5 percent in July, lifting spending up more than 35 percent at an average annual rate over the past three months. Much of the gains continue to be concentrated in the manufacturing sector, which continues to see outsized increases due to chemical manufacturers. Manufacturing is up 73.1 percent over the past year. Lodging and office have also seen strong gains and have risen 41.2 percent and 29.4 percent, respectively. At the same time, power spending, which is seeing a secular decline in demand, is down 12.6 over the past year. As written in our Nonresidential Construction Recap for August, we expect overall construction spending to continue to improve in the third quarter, which will help lift structure investment. However, the downshift in oil prices still pose downside risk to the forecast.