Construction Spending Declines in March

Construction spending fell 0.6 percent in March, marking its second drop in the past three months. Spending on private projects fell 0.3 percent, while spending on public projects tumbled 1.5 percent.

A Slow Start to 2015

Construction spending has clearly gotten off to a slow start in 2015, with both private and public construction expenditures falling throughout most of the first quarter. Declines were fairly broad based and some of the weakness has been in place for some time. Weather may have also played a role in some of the recent weakness. A more intractable problem seems to be the impact that tighter state and local budgets are playing on public works projects and the inability to find a long-term solution to fund highway and road construction.

Private residential construction expenditures fell 1.6 percent in March, following a 0.2 percent rise in February. Spending declined in all three residential categories during the month. Spending for single-family homes dropped 1.8 percent, while spending for multifamily homes fell 2.1 percent. Outlays for home improvements, which account for 28.4 percent of residential construction spending, fell 1.0 percent. We suspect that the weather played some role in the latest drop. The Northeast had a hard winter and March also saw a string of winter storms across the South. New home sales have been fairly strong through the first three months of this year and are running 19.0 percent ahead of their year-todate pace from one year ago. Builders are also more upbeat and most of the larger builders have noted that their sales and orders backlogs are growing. Apartment construction also remains red hot across much of the country, even though a handful of markets now seem to be a bit frothy.

The decline in nonresidential construction was mostly in the public sector. Private nonresidential construction rose 1.0 percent in March, with strong gains in outlays for office buildings (+2.9 percent), manufacturing facilities (+2.8 percent) and communications infrastructure (+12.0 percent). Spending for the broad commercial category, which includes retail and warehouse space, fell 2.7 percent. Declines were evident across most of the key subsectors within this category, including warehouses, which has been a key area of strength. That drop probably does not signal a letup, however, as demand for warehouse and distribution space remains exceptionally strong across much of the country. Spending for power projects fell 0.9 percent and is down a whopping 16.0 percent year over year. Outlays for electric power projects have plummeted 44.9 percent year over year. The drop signifies slower growth in energy demand, reflecting the unusually slow economic recovery, as well as increased energy efficiency by consumers.

The public sector continues to be a real drag on construction activity. Outlays for public projects fell 1.5 percent in March, marking their third consecutive decline. Weakness is evident across most key categories, including highway and street projects, where spending fell 2.4 percent in March and is down 5.6 percent over the past year, and education outlays fell 2.2 percent in March and are down 3.1 percent over the past year.