Tight Monetary Policy Weighing on both Residential and Nonresidential Activity
Source: Economics Group of Wells Fargo Bank, N.A.
Summary
Construction Spending Set to DownshiftTotal construction spending fell 0.1% during May. Both residential and nonresidential outlays dropped during the month. Although the construction market as a whole has navigated the higher interest rate environment relatively well thus far, the restrictive effects of tight monetary policy are becoming increasingly apparent across the industry. Separately reported, the forward-looking Architecture Billings Index (ABI) declined to the lowest reading since 2020 during May, which suggests further weakening in terms of construction spending is in the pipeline.
Residential Construction Broadly Pulls Back
- Overall construction spending retreated 0.1% in May, the first over-the-month dip in 18 months.
- Although residential and nonresidential outlays each weakened over the month, May’s contraction was primarily owed to a 0.2% drop in residential spending.
- A 0.7% decline in private single-family construction spending weighed heavy on residential outlays in May. Private multifamily outlays, which have broadly retreated over the past year as an influx of new supply pushes apartment vacancy rates higher, were unchanged over the month.
- We expect both single- and multifamily spending to continue trending lower in the months ahead. The pace of single-family housing permits fell to the lowest level in 10 months in May, indicating that builders are pulling back on single-family construction amid persistently elevated mortgage rates and waning buyer traffic. A sharp pullback in new multifamily starts also sets the stage for more muted apartment construction this year.