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Construction Spending Retreats in June From Record High in May but Shows Continued Strength Across Most Public and Private Investment Categories

AGC of America

Posted: August 1, 2018 | Tradewinds

Latest Spending Figures Show Benefits of Recent Tax and Regulatory Reform Measures, But Construction Officials Caution that Labor Shortages and Trade Tariffs Could Weigh on Future Growth in Demand

Construction spending declined 1.1 percent in June from an upwardly revised record level in May, but there were widespread gains in both public and private investment for the first half of the year, according to an analysis of new government data by the Associated General Contractors of America. Association officials said the relatively strong construction spending figures show how recent tax and regulatory reforms are helping boost demand for construction.

"There appears to be plenty of demand for construction despite the drop in spending reported for June," said Ken Simonson, the association's chief economist. "The estimate for May, which was already a record high, was revised sharply upward, as were numbers for April. These revisions show that the June total may be higher than initially reported and that it is wiser to focus on longer-term trends, such as the year-to-date totals for the first half of 2018 compared with the same period in 2017. Those numbers show a healthy increase in spending."

Despite the decline from May, construction spending in the first six months of 2018 combined was 5.1 percent higher than in January through June 2017, the economist pointed out. For the month, public construction spending slumped 3.5 percent, private residential spending decreased 0.5 percent, and private nonresidential construction spending slipped 0.3 percent. On a year-to-date basis, in contrast, public construction spending climbed 4.7 percent, private residential spending grew 8.3 percent, and private nonresidential construction spending edged up 1.8 percent

Among public infrastructure spending categories, the largest segment—highway and street construction--increased 4.2 percent year-to-date. Educational construction inched up 0.1 percent in the first half of the year, while transportation construction (airports, transit, public rail and ports) jumped 11.7 percent.

The largest private category, single-family homebuilding, increased 9.0 percent year-to-date, while multifamily construction spending dipped 0.7 percent, Simonson noted. The largest private nonresidential category—power construction spending (including oil and gas field and pipeline structures)—declined 0.8 percent year-to-date, but the next largest segment—commercial construction (comprising retail, warehouse and farm buildings) had a gain of 4.8 percent. Private office construction spending grew by 5.6 percent year-to-date, while manufacturing construction spending jumped shrank 8.5 percent.

Association officials said recent steps to reform the federal tax code and reduce regulatory barriers to economic growth appear to be helping boost demand for construction. But they cautioned that growing construction labor shortages and new trade tariffs affecting the price of key construction materials could hamper future sector growth.

"Tax and regulatory reform are helping stimulate new demand for construction projects." Sandherr said. "But if contractors are forced to raise prices significantly to cope with rising labor and materials costs, many public and private sector clients may scale back investments in new construction projects."

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