Fiscal Policy Helping Construction Cut Through Interest Rate Headwinds
Source: Economics Group of Wells Fargo Bank, N.A.
Summary
Prospects for the Built Environment
The construction sector seems to be defying restrictive monetary policy. Total construction spending ended April up 10% on a year-over-year basis. To be sure, the recent rise in financing costs and tighter lending standards have weighed on project outlays, in particular residential and commercial development. A downdraft in new project starts for these types of construction suggests a drop in activity is ahead in the near-term.
That noted, several segments of construction have performed considerably better, thanks in large part to fiscal policy. Notably, there has been a boom in manufacturing project spending directed toward the build-out of electric vehicle and semiconductor supply chains following the passage of the CHIPS and Science Act. The Inflation Reduction Act and Bipartisan Infrastructure Law have been a boon for investment in energy and infrastructure projects.
Looking ahead, the fiscal tailwinds look set to only intensify over the next few years as more funding from these federal programs is distributed. Meanwhile, the drags imposed by restrictive monetary policy should begin to fade as the Federal Reserve gradually lowers the federal funds target rate. Currently, inflation appears on the path back to 2% and, as such, the FOMC looks to be getting ready to initiate an interest rate cutting cycle at some point this fall. Although likely to remain elevated compared to recent norms, lower interest rates should ultimately lead to a stronger pace of construction.