Construction Spending Turning the Corner in July

Construction outlays rose a better-than-expected 1.8 percent in July, the third increase in four months. Gains were broad-based with residential up 0.7 percent and nonresidential rising 2.5 percent. Public also rose. 

Solid Third Quarter Start for Building Outlays

Starting the third quarter off on a solid note, construction spending rose 1.8 percent in July to a $981.3 billion annual pace. On net, revisions to the previous two months were positive. Private residential construction spending rose 0.7 percent, with gains in single-family, multifamily and home improvement. Although housing market indicators were mixed in July, single-family spending still eked out a modest 0.5 percent increase following two monthly declines in May and June. Multifamily construction spending rose 0.2 percent in July and is up a whopping 41.0 percent over the past year. Apartment demand remains strong and should continue to buoy construction spending in the coming years. Home improvement also rose on the month, increasing 1.2 percent. 

Private nonresidential construction spending rose 1.4 percent in July, and is now up 14.1 percent from a year earlier. Power and manufacturing made the largest contribution to the headline, with lodging, healthcare and education building also posting gains on the month. Chemical manufacturing plants, the largest component of manufacturing spending, surged 11.8 percent in July. According to McGraw Hill, the improvement in manufacturing plant construction is being led by chemical and energy plant projects. Manufacturing plant projects started in July include a petrochemical plant in Baytown, Texas and an ethylene plant in Freeport, Texas. Other sizeable manufacturing projects coming online in July were a semiconductor facility in Hillsboro, Oregon and a processing plant in Corpus Christi, Texas. Today’s impressive increase in the ISM manufacturing index for August suggests we could see continued improvement in this component in the coming months. 

Public construction spending rose 3 percent in July due to strengthening state and local outlays. State and local spending directly feed in to the BEA’s calculation for real GDP and recent figures suggest we could see an improvement in the third quarter. The biggest unanswered question, however, is the anticipated shortfall in the Highway Trust Fund. A short-term bill was passed that would fund programs over the next 10 months,  but the lack of a multi-year bill could cause some states to rush projects to the finish line before the insolvency debate rears its head once again.

Looking Ahead: Nonresidential Spending is Firming 

Overall construction spending has improved at a sluggish pace during this recovery but should gain traction along with better economic growth. Leading nonresidential indicators including starts, architectural billings and the Dodge Momentum Index suggest conditions are improving. We expect nonresidential construction spending to rise 6 percent in 2014, and increase by a more modest 3.3 percent in 2015.