Nonresidential Construction Spending Drops in Most Segments

At the beginning of the month, the Associated Builders and Contractors of America reported that national nonresidential construction spending was down in 15 of the 16 subcategories in February, indicating a “wake-up call” to contractors. Spending declined 1% during the month, according to the analysis of data published by the U.S. Census Bureau, totaling $1.179 trillion on a seasonally adjusted annualized basis.   “Virtually every nonresidential construction segment experienced a decline in spending in February,” said ABC Chief Economist Anirban Basu. “In certain instances, the monthly decline was sharp, including healthcare (-2.2%), commercial (-1.9%) and water supply (-1.8%). The optimist will likely shrug off both the January and February nonresidential construction spending declines as merely reflecting winter weather. The pessimist will proclaim this release a wake-up call to contractors and an indication that higher interest rates have finally begun to make their mark.”   Additionally, private nonresidential spending reportedly fell 0.9%, while public nonresidential construction spending was down 1.2% in February.   “As always, interpreting the data is complicated,” said Basu. “While 15 of 16 nonresidential construction segments recorded monthly declines on a seasonally-adjusted basis, all segments have experienced year-over-year growth in spending. In 10 instances, construction spending has increased more than 10%, including 36% growth in the public safety category and 32% in manufacturing. Moreover, ABC’s Construction Confidence Index indicates that contractors remain confident with respect to their sales over the next six months, signaling that the data could improve with the weather.”

Material Prices Increase

  According to an Associated Builders and Contractors analysis of the U.S. Bureau of Labor Statistics’ Producer Price Index data, construction input prices increased 0.4% in March compared to the previous month. Nonresidential construction input prices also reportedly increased 0.4% for the month. Both overall and nonresidential construction input prices are 1.7% higher than a year ago.   Prices fell in all three energy subcategories last month. Natural gas prices were down 37%, while unprocessed energy materials and crude petroleum were down 6.9% and 0.8%, respectively.   “There has been growing evidence of resurfacing inflationary pressures in the nation’s nonresidential construction segment during the past two months,” said Basu. “Were it not for declines in energy prices, the headline figure for construction input price dynamics would have been meaningfully higher. A new set of supply chain issues is emerging, including the cost of insuring ships and bottlenecks in the Red Sea, the Panama Canal and Baltimore.   “This is not especially good news for those who purchase construction services. In addition to supply chain issues, there is an abundance of publicly and privately financed megaprojects around the nation, massively increasing demand for certain inputs, and a majority of contractors expect their sales to increase over the next six months, according to ABC’s Construction Confidence Index. With continuing wage pressures and elevated borrowing costs, the implication is that financing construction projects will remain expensive relative to historic norms for the foreseeable future.”

Backlog Rebounds, Confidence Improves

  The latest Construction Backlog Indicator from the ABC also found that, despite high costs, supply chain issues and labor shortages, optimism among contractors and their backlogs is remaining high. The CBI slightly increased to 8.2 months in March from 8.1 months; however, the reading is down 0.5 months from March last year. The findings are based on an ABC member survey conducted March 20 to April 3.   “Given headwinds such as high borrowing costs, emerging supply chain issues, project financing challenges and labor shortages, the persistent optimism among nonresidential construction contractors is astonishing,” said Basu. “Last month, contractors reported rising backlog and greater conviction regarding likely growth in sales, employment and profit margins.”   The backlog is reportedly down over the past year for every region except for the Middle States, which now has the second largest backlog of any region. The South also continues to have the largest backlog, despite a large decline over the past year. The backlog revealed an increase in only a couple of sectors, including:   - the Middle States region, from 7.3 to 8.0; and - the less than $30 million company size, from 7.5 to 7.7.   The backlog fell in most sectors, including:   - the Commercial and Institutional industry, from 8.1 to 8.5; - the Heavy Industrial industry, from 9.2 to 8.8; - the Infrastructure industry, from 9.4 to 6.8; - the South region, from 9.9 to 9.7; - the $30-$50 million company size, from 8.4 to 8.2; - the $50-$100 million company size, from 10.5 to 9.7; and - the greater than $100 million company size, from 10.3 to 10.1.   The Northeast region remained stagnant at 7.4.   “While certain readings are below year-ago levels, there was broad-based improvement in March,” said Basu. “For instance, in the category of profit margins, 32% of those surveyed in February expected improvement over the next six months. That share rose to nearly 34% in March, with only 24% hinting at near-term margin compression. That indicates that though costs of delivering construction services continue to rise, contractors collectively enjoy enough pricing power to support stable to rising margins. If interest rates begin to decline during the summer as is widely expected, confidence is likely to climb further.”   ABC’s Construction Confidence Index readings for sales, profit margins and staffing levels increased in March. All three readings remain above the threshold of 50, indicating expectations for growth over the next six months.