Construction spending rises in February

Summary

Uncertainty looms over the outlook

Total construction spending improved 0.7% in February. Although gains were broad-based across major categories, an increase in residential spending drove the overall rise. Despite high interest rates, a structural shortfall of housing continues to support new single-family and home improvement outlays. On the nonresidential side of the ledger, increases in infrastructure, industrial and institutional project spending helped offset a drag from commercial development.

February's construction data were broadly positive, however uncertainty regarding trade policy has reduced visibility for the path ahead. During February, the American Institute of Architects (AIA) reported the first decline in new project inquiries since the throes of the pandemic in 2020. The drop reflects a building stack of uncertainty related to new tariffs, monetary policy and economic growth and suggests a weaker pace of construction spending moving forward.

Residential construction on the rise

• February's 0.7% rise in overall construction spending primarily was driven by higher home improvement and single-family outlays.
• Private home improvement spending rose 2.0% in February, partially making up for declines in December and January.
• Single-family construction outlays posted a 1.0% improvement, the sixth consecutive increase. This uptrend has brought the pace of private single-family outlays nearly back to its year-ago level.
• Multifamily construction is stabilizing following a year and a half of deterioration. Private multifamily outlays were flat in February, coinciding with a sideways trend in permits that was registered in recent months.
• Looking ahead, we see some scope for gains in multifamily construction amid firming apartment demand and a less daunting supply pipeline. By contrast, single-family construction looks likely to soften as elevated financing costs constrain demand and builders work down high inventory levels.
• Although single-family builders have been able to sustain buyer demand using incentives like price cuts and mortgage rate buy-downs, elevated new home inventories in the South and West appear to weighing on new permits. Expectations for tighter immigration and trade policies are also increasing builder trepidation.

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