U.S. Put-In-Place Construction Spending Hits a Soft Spot
U.S. Total Put-in-place Construction Spending
Total U.S. put-in-place construction spending, after increasing steadily (although slowly) for seven years, from 2011 through 2017, has lost upwards momentum over the past year and a bit. The cause of the overall weakness has been a retreating residential sector. Nonresidential has continued to exhibit a decent degree of uplift.
For various type-of-structure categories of construction, the charts in this article showcase three data sets – (1) seasonally adjusted (SA) monthly ‘current’ dollar volume levels (where ‘current’ means not adjusted for inflation); (2) month-to-month percent changes in the dollar volume; and (3) year-over-year percent changes in the dollar volume.
As shown in Graph 1 below, total spending on U.S. construction reached its zenith in May of last year, at $1.324 trillion. Since that peak, it has fallen by 3.2%, to land at $1.282 trillion in the latest month for which data is available, March 2019.
The average of month-to-month percent changes for total U.S. put-in-place construction spending during the past ten years has been +0.4%. In March 2019, the month-over-month figure was in negative territory, at -0.9%.
Over the past 10 years, the average of year-over-year percent changes recorded each month for total put-in-place construction has been +4.2%. In March 2019, the year-over-year change was -0.8%.
The ‘glory days’ for U.S. put-in-place construction have, for the moment at least, receded.
Total put-in-place construction was doing its best between 2012 and early 2017, when the y/y percent change curve was consistently above the 10-year average line, as seen in the lower portion of Graph 1. Recently, U.S. put-in-place construction has fallen off its earlier faster pace.
U.S. Residential Put-in-place Construction Spending
Between residential (approxmately 40% of the total) and nonresidential (60% of the total), the weakening in total put-in-place construction spending of late has been entirely due to the former losing its footing. Graph 2 shows y/y residential construction dropping below its 10-year average (i.e, the dashed horizontal line) in the spring of 2018 and subsequently plummeting.
March 2019’s residential dollar volume of $507 billion was -11% versus its April 2018 summit figure of $570 billion.
In March 2019, residential construction was -8.4% y/y, whereas its long-term average y/y change has been +8.7%. Also, in March 2019, residential was -1.8% m/m, failing to match its 10-year average m/m change of +0.6%.
Residential had a long good run, however, between mid-2012 and the fall of 2017. In fact, among all type-of-structure categories, both major and minor, residential has turned in the best y/y performance (+8.4%) during the past decade. Second place, at +7.4%, belongs to capital spending on ‘lodging’ (i.e., hotel/motel) facilities.
U.S. Nonresidential Put-in-place Construction Spending
The dollar volume of nonresidential construction work, with only a few missteps (in early 2013 and in mid-2017), has been gently but steadily climbing since the beginning of 2011. It now sits above three-quarters of a trillion dollars ($775 billion), a record high.
In March 2019, nonresidential construction’s m/m dollar volume change was -0.3%, a letdown when compared with the ten-year average m/m change of +0.3%.
But also, in the latest March, nonresidential construction’s y/y dollar volume change was +4.8%, a rate of increase more than double the ten-year average gain of +2.0%.
Nonresidential construction may not have delivered the same giddy thrills of excitement from time to time as residential in the past ten years, but it is still holding to a steadily improving course.
As a bottom line, though, it should be noted that total construction’s latest 10-year advance of +4.2% y/y has been achieved through residential managing a +8.7% y/y growth rate, while nonresidential has plodded along at +2.0%.
U.S. Hotel and Motel Put-in-place Construction Spending
The next sections look at three important sub-sectors of U.S. nonresidential put-in-place construction.
In ‘lodging’ construction, there has been a ‘boom’ underway, which was particularly evident from 2012 through 2016. Hotel/motel construction has leveled off over the past two years but, on a y/y basis, has still been on the plus side of the ledger.
The average y/y increase in accommodation investment, encompassing both new facilities and refurbishments of existing sites, has been +7.4% over the past ten years. In March 2019, the y/y figure was still robust, at +7.7
The vertical scale of Graph 4’s bottom curve, showing y/y changes in each month since January 2010, has an exaggerated range, from -64% to +48%, indicating a high degree of cyclicality.
The y-axis has a maximum of nearly +50% and in many of the months covered in the graph, the y/y capital spending increase on hotels and motels rises above +16%.
Within the current economic expansion, hotel and motel investment has been a ‘coincident’ indicator. ‘Lodging’ investment strength has gone hand in hand with exceptional jobs and national output growth, both of which have promoted tourism and business travel.
Furthermore, the heightened construction activity in the sector has come in the face of exploding online accommodation offerings through the likes of Airbnb.
U.S. Highway and Street Put-in-place Construction Spending
Politicians and the media often become ‘wild-eyed’ when discussing the subject of construction spending on streets and highways in America. A perceived poor showing is soundly derided.
There’s general agreement on the need to launch a massive new infrastructure initiative, to include airports, bridges and tunnels as well. The President and the Democrats recently agreed on a $2 trillion target, with scheduling to extend far into the 2020s.
The reality is that the historical record of U.S. spending on roadwork has not been as dismal as might easily be supposed. Graph 5 shows a new peak for highway and street put-in-place construction in the first quarter of this year, 2019. And the bottom portion of Graph 5 highlights a gain of +13.4% y/y in March 2019, after a jump of +18.0% y/y in the month prior.
The ten-year monthly average of y/y capital spending on highways and streets in the U.S. has been +1.9%, almost exactly in line with the increase in overall nonresidential construction expenditures, at +2.0%.
By way of comparison, consider that for four significant type-of-structure categories, the monthly average y/y percent change in put-in-place construction has been negative: health care facilities, -0.5%; educational facilities, also -0.5%; sewage and water treatment work, -0.6%; and public safety projects, -3.5%.
U.S. Manufacturing Put-in-place Construction Spending
Two surges in manufacturing put-in-place construction are apparent from the bottom curve in Graph 6. The outsized y/y improvements occurred in 2011/2012 and from summer 2014 through fall 2015. The dollar volume of manufacturing construction topped off at $85 billion in June 2015.
After mid-2015, there a mild pullback for three years. Most recently, an encouraging turnaround appears to be taking shape, aided by Washington’s introduction of new favorable corporate tax measures on January 1, 2018.
In March 2019, manufacturing’s construction spending was +10.3% y/y, much faster than the ten-year monthly average climb of +3.7%. Nevertheless, the potential for capital spending from traditional sources in the industrial sector may be limited. Productivity in plants is being raised by automation and robotics rather than through building new square footage.
The capacity utilization rate of the manufacturing sector remains low. It was 76.4% in March 2019, which deviated little from February 2019’s 76.5% and March 2018’s 76.3%. Among all sub-sectors of manufacturing, only ‘fabricated metal products’ and ‘paper’ have utilization rates exceeding 80%. According to the Federal Reserve, the former has a reading of 81.6% and the latter, 86.1%. Motor vehicle and parts producers are operating at 76.3% of capacity.
A new source of industrial strength is rapidly emerging, however, and it’s tied to America’s growing domestic energy supplies. Large projects in chemicals and plastics are underway or on the books in several states, with Louisiana and Texas in the forefront. Most important of all, upcoming mega-sized LNG projects are expected to provide major boosts to manufacturing investment in the years ahead.