Nonresidential construction spending dipped 1.3 percent from April to May, according to analysis of U.S. Census Bureau data.
Nonresidential spending, which totaled $684.9 billion on a seasonally adjusted, annualized rate, has expanded 1.2 percent since May 2015.
April's nonresidential spending figure was revised upward from $688.2 billion to $694.1 billion. The previous three months of data — January, February and March — all received slight downward revisions.
Partially lost amidst all the discussion of Brexit and volatile financial markets is evidence that the U.S. economy continues to expand. Construction remains one of the economy’s busier segments, with many contractors continuing to report lengthy backlogs and steady to expanding profit margins.
Many of the factors that positioned the construction sector to become more active remain in place:
- Global investment capital continues to flow aggressively to America, and interest and capitalization rates remain low.
- National output continues to climb, albeit slowly.
- The e-commerce economy is driving demand for new fulfillment centers and warehouses.
- Technology companies continue to fuel construction in cities including San Jose, California; Boston; Seattle; and San Diego, California.
That’s what makes the Census Bureau and previous construction spending reports from other organizations so surprising. When the numbers are adjusted for inflation, nonresidential construction spending today is essentially unaltered from a year ago.
The industry’s recovery appears to have stalled. Not only have spending reports indicated a lack of positive momentum, but recent employment data also suggest that nonresidential construction activity has reached a plateau.
Given lengthy backlogs among contractors, there is little reason to think that the volume of nonresidential construction put in place will weaken significantly during the near term. The data are consistent with the notion that economic actors have become more cautious over the past year, perhaps delaying projects.
This hesitation may be due to a number of factors, including concerns regarding overbuilding and the 2016 election cycle.
Weakness in the nation’s energy sector has certainly contributed to this state of affairs, but the lack of nonresidential construction spending growth is not fully explained by low oil and natural gas prices. A lack of aggressive public sector spending is also contributing to the industry's recent malaise and the outlook for 2017 and 2018 remains decidedly murky.
Only five of the 15 subsectors experienced spending growth on a monthly basis, and all five of the largest subsectors — power, highway and street, educational, manufacturing and commercial — declined in May.
Anirban Basu is chief economist with Associated Builders and Contractors.