Energy Boom Helps Lift Construction Outlays
Real GDP grew at a 4.6 percent annual pace in the second quarter, with structure investment making a modest contribution to the headline. Petroleum and natural gas exploration, which makes up the largest share of structure outlays, improved markedly during the quarter. In particular, drilling activity, as reported by the American Petroleum Institute, continued to firm in the second quarter. Energy producers, however, have dialed back production over the past two years due to the glut in natural gas supply that has driven prices to a low level
According to the U.S. Energy Information Administration, natural gas marketed production is expected to grow by an annual rate of 5.3 percent in 2014, but moderate to a 2.1 percent in 2015.1 This trend can also be seen in the overall slower pace in rig count. That said, the key underlying components driving headline structure outlays could simply shift from drilling to chemical manufacturing plant investment as domestic and foreign companies venture into natural gas reserves.
Other structure components that showed improvement were office, warehouse and institutional (religious, amusement parks, education and transportation), while power and communication outlays fell during the quarter. The improvement in structure investment is also consistent with the value of construction put-in-place and leading indicators including the Dodge Momentum Index (DMI), construction starts and architecture billings.
Structure investment should continue to strengthen in the coming quarters, especially with third quarter construction spending already off to a good start. The value of private nonresidential construction spending increased 2.1 percent in July with power, manufacturing, lodging and healthcare leading the way. With power outlays expected to return to its normal trend in the second half of the year, private nonresidential construction spending should rise 9.7 percent in 2014, and increase around 7 percent in 2015.
This report is available on wellsfargo.com/economics and on Bloomberg WFRE.