Wells Fargo Reports: Construction Spending Dips in November

Wells_Fargo_Securities_logoTotal construction spending unexpectedly fell 0.3 percent in November due to weakness in nonresidential outlays. Private construction spending rose 0.3 percent during the month, while public declined 1.7 percent.

Looking Beyond the Headline

Total construction spending fell 0.3 percent in November a seasonally adjusted annual rate of $975.0 billion, marking the first decline in five months. Although the headline reading was disappointing, revisions to the two previous months of data were positive. In fact, total construction spending in September was originally reported as a decline, but was revised to a positive reading. Private construction spending eked out a 0.3 percent increase during the month and is up 2.0 percent over the past year. However, public spending posted its third decline in four months, falling 1.7 percent in November. All of the weakness during the month was in nonresidential construction spending.

Private nonresidential construction spending fell 0.3 percent, but the decline comes on the heels of a string of positive readings that started back in July. The largest declines in November were in health care, commercial and office building; however, weakness was also seen in amusement & recreation, religious and lodging outlays. On the other hand, power construction spending rose 2.4 percent in November making the largest contribution to private nonresidential construction spending.

However, reading too much into monthly data can be a bit misleading, especially for construction spending, which tends to have fairly large revisions from month to month. Over the past year, improvement in this space has come from chemical manufacturers, lodging and office construction. All three components registered double-digit gains on a year-ago basis. Overall private nonresidential construction spending was held back during the year by power, health care and communication.

Looking ahead, we expect private nonresidential outlays to continue to see gains, but the recent slide in oil prices could put pressure on energy producers and energy-related construction plans. That said, we could see building plans reignited in other components like retail that have lagged in the recovery as the drop in oil prices boosts discretionary income.

Residential Posts Positive Gains

Total residential spending rose 0.9 percent in November, its third straight monthly gain. The monthly increase was broad based, with even home improvement breaking through its recent string of weakness. All eyes are on single-family, however, as the all-important housing market trudges through its recovery. As the labor market continues to show improvement and wages increase, especially for young adults, we expect the pace of single-family building to pick up this year. The record amount of refinancing and still-tight credit conditions, however, remain the largest obstacles for the housing market.


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