The Economics Group of Wells Fargo Bank has released a new report on construction spending. Construction activity this year has been largely resilient to broader macroeconomic headwinds. Total outlays increased 0.5% in August, solidifying an eight-month streak of improvements in 2023 and amounting to a 7.4% year-over-year gain.
Yet as construction outlays rise on trend, clear divisions are forming under the surface. An uptick in single-family starts has bolstered construction spending over the last few months, largely owed to builders’ success with incentives in the high mortgage rate environment. Multifamily outlays, by contrast, appear to be moderating as a near-record number of apartment units is set to deliver over the next few years. Similar dynamics are playing out within nonresidential construction. A bump in manufacturing outlays was the single-largest driver of August’s overall increase in nonresidential spending, a familiar theme following the shift toward domestic electric vehicle and semiconductor production. Alternatively, tighter credit conditions and higher financing costs have weighed on commercial construction, which was the largest drag on nonresidential outlays in August.
Nonresidential Spending Powered by Manufacturing and Infrastructure Projects
- Total nonresidential outlays improved for the 15th straight month, rising 0.4% in August. The headline improvement was driven by strong showings from private manufacturing and public nonresidential spending.
- Spending was mixed on the private side, with lodging and manufacturing posting the largest monthly movement. On the other hand, diminished retail and warehouse spending put some downward pressure on nonresidential spending.
- The upswing in public nonresidential spending can be attributed to a surge in conservation spending as well as infrastructure spending on power, highway & street and transportation projects. These four categories accounted for 75% of the monthly increase in public nonresidential outlays.
- The AIA/Deltek Architecture Billings Index fell back into contraction territory in August, sliding to 48.1 from 50. Although inquiries into new projects grew modestly, the value of design contracts declined for the first time since April. Business conditions have softened primarily at firms specializing in multifamily residential projects.
- Builders continue to benefit from more stable material prices. The Producer Price Index for construction materials and components fell 0.2% over the year in August. The recent leg-up in oil prices could present near-term price pressure, however. Despite slipping over the year, the PPI for construction materials and components reached a 10-month-high in August.
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