Construction Spending Stalls in the First Quarter
According to a new report from the Wells Fargo Economist team, total construction spending declined 0.2% in March, the second drop in three months. Overall construction spending got off to a slow start in 2024 with monthly readings of -0.6%, 0.0%, and -0.2% in the first quarter. Residential spending weakened in March with pullbacks across both single-family and multifamily segments. Nonresidential spending eked out a 0.2% gain, fueled by spending on the public side, particularly for infrastructure projects. Private nonresidential spending fell for a third straight month as developers remain constrained by higher interest rates and tighter lending standards. A downdraft in new project starts for these types of construction and a pullback in architecture firm billings suggests a drop in private nonresidential activity is ahead in the near term.
Residential Spending Falls Across the Board
- Total construction spending fell 0.2% in March as weaker residential and private nonresidential spending weighed on headline growth.
- Construction spending has had a slow start to 2024, declining in two of the first three months of the year. March could have marked a third consecutive monthly decline, but February’s data were revised upward from an initial 0.3% decline to a flat 0.0% reading.
- Residential spending fell 0.7% in March as single-family, multifamily and home improvement spending all moved lower during the month. Single-family construction has been the primary driver of residential spending growth as of late and now accounts for half of all private residential outlays.
- Despite the March slowdown, we still expect single-family construction to gradually improve over the course of this year, with a structural shortage in housing supply and sturdy economic growth as tailwinds.
- Multifamily outlays continued to weaken, falling for a third consecutive month in March. Rising apartment vacancies and fears of oversupply have impelled developers to pull back on new projects, as evidenced by the downdraft in multifamily permits and starts over the past year.
Public Projects Provide Buoyancy to Nonresidential Spending
- Total nonresidential spending rose 0.2% over the month, propelled by a 0.8% increase in public nonresidential outlays. Private nonresidential outlays fell for a third consecutive month, contracting by 0.2%.
- Private nonresidential outlays have floundered to start 2024, presaged by a decline in commercial building starts. Starts for commercial buildings steadily decreased this past year as higher interest rates and tighter lending standards took their toll on developers.
- Spending was mixed across major segments. Spending on warehouse, healthcare, office, educational and transportation projects all picked up during the month. However, pullbacks on retail, lodging and power projects ultimately brought total private nonresidential spending lower.
- Manufacturing, which has been a primary driver of nonresidential spending, eked out a 0.1% gain. The build-out of electric vehicle and semiconductor supply chains continues to fuel rapid growth in total manufacturing project spending, up nearly 26% over the past year.
- A slip in the AIA/Deltek Architecture Billings Index presages further difficulties for private nonresidential development. The index dropped to 43.6 in March, the lowest since December 2020 and a sharp reversal from the upward trend of previous months.
- Public spending was a bright spot in March and was driven primarily by increases in highway & street, educational and power spending. The Infrastructure Investment and Jobs Act (IIJA) continues to fuel spending on infrastructure projects, which has propelled public spending growth nearly 18% higher over the year. Looking ahead, the fiscal tailwinds look set to only intensify over the next few years as more funding from federal programs like the IIJA and the CHIPS Act is allocated.
