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June 17, 2024
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Construction Spending Edges Higher in July



Mark Vitner, Senior Economist
Wells Fargo Securities Economics Group

Charles Dougherty, Economist
Wells Fargo Securities Economics Group

Construction activity appears to be holding up fairly well relative to other hard-hit industries. Total construction spending rose by 0.1% during July and is down just 0.1% compared to the same month last year. Furthermore, overall outlays through July are running 4.0% ahead of their year-to-date pace. The resiliency on display over the past few months makes sense given the strong start to the year. Moreover, many construction projects were permitted to continue while other parts of the economy were shut down.

That said, the construction industry has certainly not been immune to the negative impacts of the COVID-19 crisis and total spending remains about 5.3% below February’s peak. Similarly, construction employment, which has recovered about 60% of the over one million jobs lost during the lockdown period and is still 5.8% below peak levels.

July’s positive result was flattered by a 2.1% upturn in residential spending. Single-family and multifamily both gained during the month, rising 3.1% and 4.9%, respectively. We expect the strength in single-family construction to continue, as record low mortgage rates and a renewed desire for a suburban escape has sparked a surge in home buying. Although sky-rocketing lumber prices (up over 150% since April, a consequence of a COVID-19 induced reduction in sawmill capacity and unexpectedly strong builder demand), could potentially constrain single-family activity in the months ahead.

Nonresidential spending dipped 1.2% during the month, as the uncertainty surrounding when close-contact commercial activity (such as at retailers and offices) will return to normal continues to weigh heavily on construction. The declines were centered in commercial (-2.9%), healthcare (-2.8%), educational (-2.6%) and lodging (-2.0%) subcategories. Office construction fell 0.4%, while transportation outlays slipped 0.3%. Some areas have been lifted by the effects of the pandemic. The boom in online shopping has bolstered warehousing construction, which is up 20.2% over the year.

Public sector spending declined 1.3% during July, but expenditures are up 5.1% over the year. Public outlays have waned in recent months, as many summer projects were pulled forward into the spring when there was less traffic on the roads. Highway and street spending weakened 3.1% while education fell 3.0%. Public safety projects, including police stations and detention centers, have surged 57.2% over the past year. With tax revenues decimated, some further pullback in public spending is expected.

Overall, the path forward for construction looks to be forked. Residential activity will likely continue to strengthen as builders try to catch up with blistering homebuyer demand. The recent strength will add to what already looked like a mammoth Q3 rebound in residential investment and real GDP. On the other hand, heightened economic uncertainty will likely prevent many nonresidential projects from moving forward.

Source: U.S. Department of Commerce 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 informationand 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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