Construction Spending Disappoints in January

Starting the year off on a weak note, total construction spending fell 1.1 percent in January. Private outlays fell 0.5 percent, while public dropped 2.6 percent. Private residential eked out another positive reading.

Weather Woes Depress Outlays in January

Overall construction spending fell 1.1 percent in January to a seasonally adjusted annual rate of $971.4 billion. December outlays were upwardly revised, while spending in November received a downward revision. Private construction spending fell 0.5 percent, with residential posting its fourth positive reading in five months. All components of private residential spending increased during the month, with the largest contribution coming from single-family outlays. The improvement in single-family outlays is consistent with an expected pickup in sales activity and in starts this year. Private nonresidential construction spending fell 1.6 percent in January, marking its first decline since June 2014, but much of the headline weakness was due to a 2.6 percent decline in public construction spending.

At first glance, the more-than-expected decline in construction spending is very disappointing, but weather is part of the reason for the slide. Early indicators for construction spending, including projects in the planning phase, starts and architectural billings, all pointed to looming weakness this month. If weather is the culprit, we could see another round of soft construction reports next month.

Private nonresidential outlays showed nearly broad-based declines. Power, the largest component of private outlays, fell 0.8 percent in January. Despite the weather, manufacturing and communication increased during the month. Manufacturing construction spending rose 4.2 percent and is up 22.5 percent over the past year. Chemical manufacturing continues to be a boon for this sector and will likely continue to show improvement this year. Chemical manufacturing rose 11.6 percent in January and is up a whopping 57.6 percent year-over-year.

Construction Wage Inflation Still Contained

Inother news, employment and labor costs for construction workers appear to be supportive of continued gains in the sector. According to the Associated General Contractors of America’s Construction Hiring and Business Outlook for 2015, most contractors see demand growing or remaining stable this year. However, the survey continues to show that contractors see the growing shortage of qualified workers as a major obstacle. A labor shortage could spell trouble down the line for construction firms in the form of rising wage inflation. To date, we have yet to see any worrisome signs of a spike in wage inflation. In fact, average hourly earnings for construction workers rose 2.1 percent in 2014 and remains well below its long-run trend. Moreover, hours worked for construction workers in January fell to its lowest level since early 2014. The construction component of the Employment Cost Index is also showing that wages and salaries are contained. Construction wages and salaries were up 1.5 percent in 2014 compared to an increase of 1.7 percent in 2013.