Construction spending bounces back in November

Despite November's improvement, headwinds begin to intensify for the construction industry

In a surprise to the upside, total construction spending increased 0.2% in November. The gain was driven mostly by an 1.7% rise in private nonresidential expenditures. Residential construction spending declined for the sixth consecutive month, with declines on both the public (-0.1%) and private (-0.5%) sides.

Total nonresidential construction spending rose 0.9% during the month, which equates to an 11.8% year-over-year gain. This increase can be largely attributed to the private category, with private nonresidential construction increasing 1.7% in November. Public nonresidential construction dropped 0.1% over the month.

Nearly all major categories of private nonresidential spending registered growth. Manufacturing led the way with a 6.5% jump in November. Total private manufacturing spending is now up 43.2% over the past year. The monthly increase was aided by a 16.3% jump in computer and electronic manufacturing, reflecting soaring investment in electric vehicle supply chain expansion and new semiconductor plant construction. Other notable increases in private outlays occurred in power (1.2%) and transportation (2.8%).

Yet, several categories within private nonresidential construction declined during November. Private commercial spending was essentially flat (0.0%) during the month, although remains 20% above year-ago levels. Similarly, office construction spending fell in November (-0.1%) bringing spending to 2.3% above November 2021 levels. The annual improvement likely indicates an increase in data center and office repair and renovation projects as opposed to new office construction, which remains depressed amid the rise of remote work.

November's 0.5% drop in private residential spending was a smaller decline than the 0.8% decline experienced the prior month. The more modest fall was the result of a solid gain in multifamily (2.4%) and home improvement (1.3%) outlays. Single-family spending declined 2.9% during the month. A broad-based decline in building permits recently suggests that residential construction will continue to retreat in coming months.

Putting November's increase in nonresidential spending aside, signs point to a weakening in nonresidential activity amid rising financing costs in the years ahead.

The Architecture Billings Index (ABI) waned for the second straight month in November, falling to 46.6 from 47.7. Although the volume of new contracts ticked up slightly, the value of new design contracts continues to fall as softening business conditions have led some firms to place larger projects on hold. Billings fell in the West, Midwest and Northeast while billings in the South ticked up slightly.

Despite the downturn in billings, the same survey found that architecture firms are largely optimistic about 2023, with 63% of respondents expressing a positive outlook for the year. According to the AIA (American Institute of Architects), firms in the Midwest were the most optimistic while firms in the Northeast were the least optimistic.

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