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May 18, 2024
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Construction Spending Declines in May


This report was provided by Wells Fargo Securities Economics Group and written by:

Mark Vitner, Senior Economist

Charlie Dougherty, Economist

Hop Mathews, Economic Analyst

Construction Spending Hampered by COVID-19

The negative impacts of the coronavirus lockdowns were once again readily apparent in May construction spending, which fell 2.1%. Outlays have now fallen 5.9% since peaking in February. The decline was surprising, as construction came back online relatively quickly following the lockdown. Aggregate measures of construction activity, such as housing starts and construction employment, show more improvement.

While many projects were quick to resume, many builders might have become more cautious about starting new projects. Some large municipalities were also slower in allowing construction to resume. The sudden halt to building activity in many areas may have created some unanticipated hurdles to restarting.

Much of the decline was owed to a 4.0% drop in residential outlays. Single-family outlays fell 8.5%, while multifamily rose 2.3%. Home improvement spending edged up 0.1%. Continued weakness in single-family is disappointing and somewhat surprising given the improvement in home builder confidence. Multifamily outlays tend to be more volatile on a monthly basis. We expect the trend will weaken this year alongside a COVID-induced spike in apartment vacancies and some softening in rents.

Nonresidential spending dipped 0.9%, but there was a significant divergence in public and private outlays. The 1.2% gain in public expenditures was driven by a 2.8% rebound in highway and street spending and a 1.2% climb in transportation outlays. Education building expenditures also eked out a 0.1% rise. Despite this strength, the COVID-19 crisis has put the fiscal health of many state and local government under tremendous pressure. Declines in tax revenues will likely lead to large cutbacks in public construction projects this year and next, absent significant federal relief. Private nonresidential spending slipped 2.4%. Nearly every major subcategory declined, notably healthcare (-6.7%), power (-3.1%), manufacturing (-4.1%) and lodging (-3.6%).

In a separate release this morning, the ADP employment report provided a preview of what the more widely-followed BLS report will reveal about employment conditions in the construction industry. The ADP report showed the construction industry gained almost 400,000 jobs during June, more than any other major industry outside of leisure & hospitality. The gain is the latest piece of evidence that activity in the construction industry is on the path to recovery. Looking further ahead, however, the prospects for the construction industry over the next 12 months are dimming as new projects continue to be curtailed by heightened economic uncertainty. In May, the forward-looking Architecture Billings Index only partially retraced the massive declines in recent months. The drop in billings suggest the pipeline of nonresidential projects will thin further during the second half of the year.

Source: U.S. Department of Commerce, American Institute of Architects and Wells Fargo Securities

Wells Fargo Securities Economics Group publications are produced by Wells Fargo Securities, LLC, a U.S. broker-dealer registered with the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, and the Securities Investor Protection Corp. Wells Fargo Securities, LLC, distributes these publications directly and through subsidiaries including, but not limited to, Wells Fargo & Company, Wells Fargo Bank N.A., Wells Fargo Clearing Services, LLC, Wells Fargo Securities International Limited, Wells Fargo Securities Canada, Ltd., Wells Fargo Securities Asia Limited and Wells Fargo Securities (Japan) Co. Limited. Wells Fargo Securities, LLC. is registered with the Commodities Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. Wells Fargo Bank, N.A. is registered with the Commodities Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. Wells Fargo Securities, LLC. and Wells Fargo Bank, N.A. are generally engaged in the trading of futures and derivative products, any of which may be discussed within this publication. Wells Fargo Securities, LLC does not compensate its research analysts based on specific investment banking transactions. Wells Fargo Securities, LLC’s research analysts receive compensation that is based upon and impacted by the overall profitability and revenue of the firm which includes, but is not limited to investment banking revenue. The information and opinions herein are for general information use only. Wells Fargo Securities, LLC does not guarantee their accuracy or completeness, nor does Wells Fargo Securities, LLC assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. Wells Fargo Securities, LLC is a separate legal entity and distinct from affiliated banks and is a wholly owned subsidiary of Wells Fargo & Company © 2020 Wells Fargo Securities, LLC.

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