National nonresidential construction spending slows in July

National nonresidential construction spending declined 0.3 percent in July, totaling $776 billion on a seasonally adjusted annualized basis, according to a recent Associated Builders and Contractors (ABC) analysis of U.S. Census Bureau data. July spending also increased 0.1 percent compared to July 2018.

The June 2019 estimates were also revised upward from $773.8 billion to $778.5 billion.

In July, private nonresidential spending decreased 0.8 percent on a monthly basis and 2.7 percent on a yearly basis. Public nonresidential spending, however, increased 0.4 percent for the month and 4.3 percent for the year.

"While there is much discussion regarding the extent to which the U.S. economy has slowed and will slow going forward, these considerations have relatively little to do with today's nonresidential construction spending data," says ABC Chief Economist Anirban Basu. "Trends in nonresidential construction tend to lag the broader economy by a year to 18 months, which means that today's construction spending numbers reflect in large measure broader economic dynamics characterizing 2018. Last year was a good one for the economy, persuading many to move ahead with projects.

"Recent construction spending data, therefore, have been impacted by factors more closely related to the industry. For instance, the recent weakening in certain private construction segments, including office and lodging, are likely due to growing concerns regarding overbuilding and the somewhat higher cost of capital. Public spending growth, despite solid numbers in July, has been more erratic of late. This may have something to do with the looming insolvency of the Highway Trust Fund, which is expected in 2021 without congressional action. There is already evidence that some states have begun to postpone planning for new projects until there is more clarity regarding federal infrastructure spending, evident in the 2.7 percent spending decline observed in the highway and street category.

"Despite recent slow growth in construction spending, the U.S. construction industry has continued to expand employment levels during the past year. ABC’s Construction Backlog Indicator continues to show that the average contractor or subcontractor will remain busy over the near term. One of the reasons for relatively slow growth in nonresidential construction spending may simply be that the U.S. contracting community cannot deliver significantly more service in the context of worsening labor/skills shortages. In other words, nonresidential construction volume may already be near its peak potential supply. Given that, one wouldn't expect substantial growth in construction spending even in the context of significantly stronger economic growth."