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Construction Spending Wavers

At the start of March, the economic outlook was downbeat but relatively straightforward. Expert forecasters agreed that inflation was too hot, demand too strong, and labor too scarce. The only question at that time was whether the Federal Reserve would raise rates by 25 or 50 basis points at their next meeting.

Then came the events of March 10-12 and the failing of Silicon Valley Bank and later Signature Bank. While the fallout from that episode appears to be contained, the resulting tightening of credit conditions has significantly altered the outlook.

After rapid spending growth from May to November of 2022, U.S. nonresidential construction spending has stagnated, rising just 1.2% over the past four months.

Importantly, these figures are not adjusted for inflation, and with construction input costs up nearly 40% since the start of the pandemic, nonresidential spending is likely down in real terms. Were it not for significant investment in manufacturing facilities, which is up 53.5% over the past year, the nonresidential segment would be even weaker.

In Canada, nonresidential spending continues to grow, albeit at a sluggish pace. As is the case in the U.S., industrial-related spending has powered the segment, rising 25.1% during the year ending in January 2023.

The residential segment has contracted in the U.S. and is up just 1.5% year over year in Canada, a reflection of the deleterious effects high mortgage rates have on homebuying. When inflation subsides and interest rates begin to fall, expect a glut of pent up demand to be released, reinvigorating the residential segment.

Click here to download this month’s full economic update
(which discusses: construction spending, inflation, manufacturing, materials prices and labor shortages.)