Spending Rising On-Balance, but Weakness Materializing in Some Segments
National construction spending continues to rise on-trend. Total outlays increased 0.4% in September, the ninth consecutive monthly improvement. Resilience is also evident in the upward revisions to prior data, with August’s originally reported 0.5% gain revised up to 1.0%. September’s strength can be largely attributed to an upshift in single-family buildings as builders continue to find success in employing price discounts and rate incentives to sell new homes. Multifamily construction outlays have been less resilient amid rising apartment vacancy rates, prompting the first dip in multifamily outlays in 13 months.
While nonresidential investment also continues to grow, momentum appears to be fading. A bounce in educational outlays at the start of the school year lifted nonresidential construction spending in September as pullbacks in transportation and healthcare weighed on spending. In a turn of events, a dip in manufacturing construction was the largest drag on nonresidential outlays over the month after previously propelling the trend rise in nonresidential investment. We caution that monthly data can be subject to hefty revisions, and prior manufacturing spending data have been consistently revised higher. Nevertheless, the forward-looking Architecture Billings Index suggests that tighter credit conditions and elevated financing costs are apt to create a weaker environment for nonresidential investment in the months ahead.
Back-to-School Spending Helps Firm Up Nonresidential Outlays
- A strong outturn for educational outlays at the start of the school year boosted overall nonresidential spending in September. Nonresidential construction spending rose 0.3% over the month on the heels of an upwardly revised 0.7% bump in August.
- September solidifies a 16-month trend improvement in nonresidential construction outlays, lifting them 19.0% year-over-year.
- A pullback in private manufacturing spending made the largest dent in nonresidential construction outlays in September. We caution that construction spending data can be subject to substantial revisions. Up to this point, manufacturing outlays have been a major factor propelling the trend rise in nonresidential construction as firms look to expand domestic capacity for semiconductor and electric vehicle production.
- Declines in transportation, healthcare and lodging outlays also weighed on nonresidential construction spending in September.
- Alternatively, increases in commercial and power construction spending lifted private nonresidential outlays. Although commercial spending improved in September, the broader trend suggests that commercial construction is slowing amid tighter credit conditions and elevated financing costs.
- Business conditions at architecture firms continue to deteriorate, foretelling weaker nonresidential construction ahead. The AIA/Deltek Architecture Billings Index in September fell to its lowest level since December 2020 as higher interest rates take a toll on construction projects. The value of newly signed design contracts also contracted, suggesting firms may be less willing to move forward with larger projects.
