Residential and nonresidential construction dragged in March

May 1, 2024

Construction spending disappointed in March, slumping 0.2%. Both residential and nonresidential private construction dragged activity lower during the month. Public construction spending finally turned positive after two consecutive months of declines. Costs of inputs for construction industries moved up 1.8% in March compared to a year ago, according to the producer price index. While energy costs remain muted, other materials and labor cost pressures are impacting margins.

Private residential construction fell 0.7% in the month. Single-family construction, which had been on a tear for ten consecutive months, slipped 0.2% while multifamily construction slumped another 0.6%. New multifamily construction will remain muted while builders finish the backlogs of apartments, which hover close to their record highs of one million units. Rising mortgage rates hampered residential activity in recent weeks as expectations for a cut in rates from the Federal Reserve are pushed out further into the end of this year.

Home builders have seen robust demand coming from millennials, who are now the largest generation in the workforce and in their prime home buying years. Builders have pivoted to offering mortgage rate buydowns and building smaller homes to match the needs of first-time buyers. The resale market remains significantly undersupplied, which is why construction of new homes finally hit a million units for the first time since 2007 in 2022 and 2023. That is still not enough to meet the needs of those sidelined by the undersupplied housing market.

Private nonresidential construction fell 0.2% as commercial and power construction lost ground. The largest category, manufacturing construction, eked out a 0.1% gain as computer, electronic and electrical manufacturing jumped another 1% in March. Significant investment in chip plants and data centers over the last few years will keep this category growing at a solid clip in the near term. Energy grid needs will only expand, as the processing capacity of GenAI technology needs more power. Additionally, transformers have been in significantly short supply, with lead times rising fourfold over the past three years. That puts a ceiling on how fast infrastructure spending can be translated into completed projects. Labor shortages only add insult to injury.

Public construction spending, most of which occurs at the state and local levels, grew 0.8% in the month as almost all components of spending posted increased activity. Power infrastructure spending grew 3.3% in March and 71.1% from a year ago. State and local governments are flush with cash as a majority of states exceeded revenue expectations last fiscal year and will likely do so again this year.