Construction Outlays Weaker Than Expected, but Trend is Up
Construction spending rose to an $808.1 billion annual pace, up 6.0 percent on a year-ago basis. Total construction spending was weighed down by a decline of 1.1 percent in public nonresidential. Private residential and nonresidential construction each rose 0.7 percent on the month.
While revisions to previous months’ data show activity was a bit weaker than previously reported, the outturn in March was better than the BEA’s conservative assumption for first-quarter economic growth. This suggests structures could add 0.2 percentage points to first-quarter real GDP. That said, the construction spending release does not include drilling and exploration for petroleum and natural gas, which has shown a downward trend over the last three quarters and an upward revision to first quarter real GDP due to structures would be a fairly large swing from the earlier reported drop of 12.0 percent. It is important to note that these numbers are notorious for huge revisions. Moreover, the trend is much more supportive of growth than the monthly change purports. Indeed, the forward-looking architectural billings index has been in expansionary territory since November and continues to suggest positive momentum in the coming months, and commercial real estate fundamentals continue to improve, with vacancy rates inching lower and demand picking up.
Private Nonresidential and Residential Outlays
Private nonresidential outlays rose 0.7 percent on the month, with office, manufacturing, communication, transportation, lodging and power showing gains. On a trend basis, power and manufacturing will likely continue to see improvement. Indeed, power outlays, which include power plants, oil and gas, as well as wind and solar, are up 30.9 percent over the past year and manufacturing construction spending is up 38.6 percent.
Private residential construction spending also rose 0.7 percent in March, with single-family outlays up 3.8 percent. Single-family construction spending has now shown gains nine out of the past 10 months and is up 10.3 percent on a year-ago basis. Home improvements, however, fell 1.9 percent, the fourth consecutive monthly decline. Multifamily pulled back 3.1 percent on the month, but we continue to expect improvement in the coming months, as apartment demand remains solid. Indeed, apartment vacancy rates continue to trend lower and are now 5.2 percent.
Construction Spending Outlook
While construction spending can be volatile on a monthly basis, we continue to expect improvement in the coming quarters. We expect structures to show modest improvement in the second half of the year, but to increase at a 5.0 percent pace in 2013. Residential investment should also continue to show improvement.
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