Weather, financing woes end 19-month construction spending streak

Dive Brief:

Nonresidential construction spending decreased 0.4% in January to a seasonally adjusted annual rate of $1.19 trillion, according to Associated Builders and Contractors’ analysis of U.S. Census Bureau data.
The drop in January finally marks the end of a 19-month streak in construction spending growth, according to the report. Still, contractor confidence remains high, suggesting a likely bounceback in construction spending in the near term, said Anirban Basu, ABC chief economist.
“Despite January’s disappointing number, nonresidential construction spending is still up more than 17% over the past year,” said Basu in the release. “Given that year-over-year strength and the fact that a majority of contractors expect their sales to increase over the next six months, according to ABC’s Construction Confidence Index, spending is likely to rebound over the coming months.”

Dive Insight:

The drop, following more than a year and half of construction spending growth, stems from two factors, said Ken Simonson, chief economist for the Associated General Contractors of America.

First, severe weather across much of the United States likely curtailed outdoor construction activities, impacting sectors such as highways, sewer and wastewater and water supply, as well as conservation and development projects like rivers, harbors and parks.

“The dip in January is more likely due to bad weather than to weakening demand overall,” said Simonson.

Basu echoed that sentiment in ABC’s report, highlighting the role of weather-related factors in the decrease.

Spending on sectors most exposed to severe weather all declined, according to the U.S. Census Bureau data. For example, highways and streets decreased 2.2% in January, while water supply projects tumbled 2% and sewage construction dropped 1.1%. Public nonresidential construction declined 1% in January, according to the data.

Second, elevated borrowing costs continue to hinder construction activity across the board, especially on private construction projects, said Simonson.

“High financing costs and tighter lending standards are dragging down investment in income-dependent projects for which rents are flat or falling in many markets,” said Simonson in an email to Construction Dive. “[That includes] apartments, warehouses, offices, retail and lodging.”

The nonresidential construction category primarily drove January’s weakness in construction spending, according to a Wells Fargo report. Ten of the 16 nonresidential categories posted declines, according to ABC.

However, Basu noted that construction spending in the manufacturing category continued to surge in January. The sector ticked up 2.1% in January, the most of any nonresidential construction sector in the industry, according to the U.S. Census Bureau data.

Manufacturing now accounts for nearly $1 of every $5 of nonresidential construction spending, said Basu.