Construction spending fell in May, weighed down by interest rates

The years since the depths of the pandemic have been pretty good for construction spending in this economy. There is, after all, a housing shortage to make up for, and then there’s all of that federal money from the CHIPS Act and infrastructure law pouring into new projects.

Yet construction spending actually declined between April and May, according to new data from the Census Bureau. It didn’t go down a lot — just a tenth of a percent. But it was the first decline since October 2022.

And it’s more than a blip. That tenth of a percent doesn’t tell the whole story, said Jay Bowman, a partner at engineering and construction consulting firm FMI.

“The idea that there’s this monolithic construction industry is unrealistic,” he said.

Bowman said parts of the industry are doing just fine, like public infrastructure funded by a flood of government support. The decline is in the residential sector.

“I would say that is the most economically sensitive part of the construction industry because you’re talking about individuals and their pocketbooks.”

The factor that’s hitting those pocketbooks hardest? Interest rates, which the Federal Reserve raised in 2022 and 2023 to quell inflation. “A project that would have made sense for a developer two years ago doesn’t make sense where interest rates are,” Bowman said.

Brian Turmail, vice president of public affairs and workforce at Associated General Contractors of America, said even amid a housing shortage, higher interest rates sap consumers’ buying power and developers’ ability to finance projects.

“We have heard anecdotally from many of our members about ranges of projects that have been delayed, postponed or canceled because they no longer pencil out. They don’t ever make financial sense because interest rates are so high or just hard for developers to get financing,” he said.

And the obstacles don’t stop there. Anirban Basu, chief economist of Associated Builders and Contractors, said some post-pandemic woes have lingered.

“Supply chain issues that keep materials in short supply and highly priced. We’ve got skilled labor force issues, meaning we don’t have enough skilled construction workers, which also drives up cost,” he said.

All of that throws water on the housing market.

“You just can’t make a love connection. Because there are people who want housing, but they can’t afford what builders are able to supply under current circumstances. And that’s where we are,” Basu said.

He expects this downward trend to continue. And the way it would most likely be reversed is for the Federal Reserve to cut interest rates.