Construction spending unexpectedly fell 2.1 percent in January with upward revisions to prior months’ data. Residential outlays were flat on the month, while nonresidential and public outlays showed weakness.
Construction outlays fell 2.1 percent in January to a $883.3 billion annualized pace. However, construction spending is notoriously volatile on a monthly basis so looking at the trend is far more instructive. On a year-ago basis, construction spending is now up 7.1 percent. Previous months’ data were upwardly revised, which suggests structures could make an even larger contribution to fourth quarter real GDP. Public spending was down 1.0 percent with across-the-board declines.
Residential Outlays Continue Impressive Gains
Single-family construction rose 3.6 percent, the ninth consecutive increase and multifamily rose 1.7 percent. Solid gains in single-family and multifamily helped offset a decline of 4.3 percent in home improvements. The consistent gains in single-family outlays are not surprising given ongoing improvement in the housing market, including builder sentiment, sales activity and starts and permits. Indeed, much of the upward momentum in residential continues to be due to modestly increasing prices and less competition from foreclosures. We expect residential construction spending to continue to improve in the coming months with the key home buying season seeing a boost in activity. While the residential market is a bright spot, tight lending standards, low inventory and concentrated activity in select markets are putting a lid on more robust activity.
Nonresidential Remains Volatile, but Trend Is Up
Private nonresidential spending fell 5.1 percent with power, manufacturing and lodging largely accountable for the pullback. Commercial, which includes autos, retail, and warehouse, did not rise enough to offset the declines. In fact, commercial is expected to be a bright spot for nonresidential construction spending. Retail construction spending could increase about 6 percent this year as the housing market gains modest momentum and retail sales improve. Improvement in warehouse fundamentals has created a robust pipeline of build-to-suit and speculative projects supporting about a 10 percent increase in 2013. We also expect lodging and manufacturing to show gains.
Looking Ahead
Residential improvement rose at an 11.9 percent annual pace in 2012 and is expected to make further progress in 2013 and 2014. Residential construction contributed 0.4 percentage points to real GDP in the fourth quarter and based on projections should continue to boost headline economic activity. Despite monthly volatility, nonresidential construction spending is on track to make progress over the next two years as well. We expect structures, which also include brokers’ commissions, net purchases of used structures and mining exploration, shafts and wells, to increase around a 2 percent in 2013 and about 6 percent in 2014.
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC