Construction Spending Posts Another Gain in May

Construction spending rose 0.8 percent in May, which was better than the consensus estimate. Private and public outlays improved during the month. Single-family was flat, while nonresidential increased.

Second Quarter Looking Hopeful

It appears construction spending has shaken off its winter malaise. Total construction spending rose 0.8 percent in May, to a seasonally adjusted annual rate of $1,035.8 billion, marking the sixth month of positive outlays. During the first five months of the year, construction spending rose 5.9 percent and is up 8.2 percent over the past year. Private construction rose 0.9 percent and even the once beleaguered public sector rose for the third straight month. Earlier in the year, there was some doubt about the strength of the construction recovery. It turns out that unseasonable weather was indeed a major culprit in the slower pace of construction outlays. Now that the sector is on solid footing, we can get a better idea of what subcomponents are driving the headline.

Single-Family Gearing Up for Improvement

The closely-watched residential component eked out a paltry 0.3 percent gain during the month. Single-family construction came in flat in May, while home improvement increased 0.9 percent. Construction typically lags an increase in demand and the good news is we are beginning to see sales activity improve. New home sales activity reached the highest level in seven years in May and the existing home sales report showed that even the longstagnant share of first-time home buyers is increasing. Moreover, builder sentiment reached its highest level in nine months and buyer traffic is finally perking up. Multifamily construction spending also barely posted a positive reading for the month, but we are likely seeing a hand off in activity from multifamily to single-family.

The Architecture Billings Index has been signaling a slowdown in the multifamily sector for four months now and the apartment vacancy rate is projected to bottom this year. Although we expect a slower pace of construction following an apartment glut in some markets, the sector will continue to show positive gains on the back of favorable demographics. In fact, multifamily construction spending is up 21 percent over the past year.

Nonresidential Gaining Momentum

Thanks to manufacturing outlays, private nonresidential construction is gaining traction. Private nonresidential outlays rose 1.5 percent and is up 12.7 percent year over year. Chemical and transportation equipment outlays have contributed outsized gains in recent months. Also supporting headline growth during the month was lodging, power, communication and office. On the other hand, commercial, healthcare and education fell during the month. We continue to expect nonresidential construction spending to improve over the next two years. Commercial construction was the first sector to show improvement during the recovery, but early indicators suggest institutional spending will also pick up during the year.