The PNC Financial Group recently reported that construction spending rose 1.2 percent in February, according to the Census Bureau, erasing some of January’s 2.1 percent decline (unrevised). Growth in December was revised down sharply, from 1.1 percent to 0.1 percent. Construction spending has increased in ten of the past eleven months, and in February was up 7.9 percent from one year earlier.
Spending rose in the three major categories from January to February. Private residential construction spending was up 2.2 percent, while private non-residential spending was up 0.4 percent. Public construction spending rose 0.9 percent in February. Private residential construction spending is leading the economy, and was up 20.1 percent in February from one year earlier as the homebuilding recovery continues. Private non-residential spending was up 6.1 percent year-over-year, while public spending was down 1.5 percent.
Residential building has been running ahead of overall construction over the past year. Many areas of the country have worked off the excess supplies of homes that developed during the housing boom. With prices down substantially from a few years ago, an improving labor market, very low mortgage rates, and gradually easing lending standards, residential construction activity has steadily improved over the past two years.
Conditions in the rest of the construction industry are more mixed (see Chart 1). There has been more modest growth in non-residential private construction recently. Office-using employment has been increasing for three years, but is still down by almost 600,000 from its peak in the summer of 2007, limiting the need for new office space. The drop in consumer spending during the recession and the increasing importance of internet-based retailing has weighed on the recovery in construction of retail space. And spending cuts at all levels of government have hit public construction, with spending down 16 percent from its peak four years ago.
Construction employment has increased by more than 280,000 since industry payrolls bottomed out in early 2011, but is still down by almost 2 million from its peak in 2006. The labor market recovery will remain disappointing until there is stronger growth in construction employment. The industry should continue to improve throughout 2013 and into 2014. Residential construction will continue to lead the industry this year. Excess supply continues to diminish, and housing starts are still running well below long-run demand given demographics. Non-residential construction will also continue to improve, but at a slower pace given the surfeit of commercial space in many markets. Private construction will remain a drag in 2013 given tight budgets and especially federal spending cuts from the sequester.