Construction spending surprises with a September rebound

November 02, 2022

The housing market has been the sector hardest hit by the Federal Reserve’s aggressive interest rate hikes, which are expected to rise yet again this week, for the sixth time this year (Photo: Reuters/Nathan Frandino/File Photo)

U.S. construction spending unexpectedly rebounded in September, amid a surge in investment in nonresidential structures that offset a further decline in outlays on single-family homebuilding.

The U.S. Department of Commerce reported this week that construction spending rose 0.2% in September after declining 0.6% in August.

Economists polled by Reuters had forecast construction spending would decrease 0.5%. Construction spending advanced 10.9% on a year-on-year basis in September.

Spending on private construction projects rose 0.4% after dropping 0.7% in August. But investment in residential construction was unchanged, with spending on single-family projects dropping 2.6%. Outlays on multi-family housing projects gained 0.3%.

The housing market has been the sector hardest hit by the Federal Reserve’s aggressive interest rate hikes, which are expected to rise yet again this week, for the sixth time this year. The U.S. central bank is expected to deliver another three-quarters of a percentage point rate hike as it fights to cool demand for labor and the overall economy to bring inflation down to its 2% target.

The 30-year fixed mortgage rate averaged 7.08% last week, breaking above 7.0% for the first time since April 2002, according to data from mortgage finance agency Freddie Mac.

Residential investment dropped for a sixth straight quarter in the third quarter, the longest such stretch since the housing market collapse in 2006, the government reported last week.

“The construction market is in a transition that is likely to accelerate in the months ahead,” Ken Simonson, chief economist for Associated General Contractors of America was quoted last month. “Steeply rising interest rates have crushed demand for single-family housing and threaten developer-financed projects, while newly enacted federal legislation will soon boost investment in power, manufacturing and infrastructure construction.”

Even with an aggressive strategy on interest rates, inflation persists and employment continues to grow. This economic resilience suggests the Federal Reserve will have to raise interest rates even faster to stabilize prices.

In September, spending on private non-residential structures like gas and oil well drilling jumped 1.0%. Outlays on non-residential structures have declined for six straight quarters.

Spending on public construction projects slipped 0.4% in September after a similar drop in August. Investment in state and local government construction projects increased 0.6%, while federal government construction spending plunged 12.7%.

Ed Sulllivan, senior vice president and chief economist for the Portland Cement Association (PCA), stated in a recent economic forecast that infrastructure will pick up where housing drops off.

“Significant infrastructure spending will materialize just as higher interest rates slow private sector construction, particularly in housing,” he said.

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