Construction spending has been strong in this economy since the pandemic hit, as a housing shortage is being filled and federal funding from the CHIPS Act and infrastructure bills is pouring into new projects.
But the latest data from the Census Bureau shows that construction spending actually fell from April to May. The decline wasn't large — just 0.1% — but it was the first decline since October 2022.
And it's not just a blip: That 0.1% doesn't tell the whole story, said Jay Bowman, a partner at engineering and construction consulting firm FMI.
“The idea that the construction industry is a monolith is unrealistic,” he said.
Bowman said some parts of the industry, such as public infrastructure funded by significant government support, were doing well while the residential sector was in decline.
“This is arguably the most economically sensitive part of the construction industry because we're talking about individuals and their wallets.”
The thing hitting their wallets the hardest are interest rates, which the Federal Reserve has increased in 2022 and 2023 to keep inflation in check. “Projects that made sense for developers two years ago just don't make sense with interest rates where they are now,” Bowman said.
Brian Turmale, vice president of public affairs and workforce for the National Association of General Contractors, said rising interest rates will erode consumer purchasing power and developers' ability to finance projects at a time when the housing shortage continues.
“We've heard anecdotally from many of our members about various projects that have been postponed, postponed or even cancelled because they were no longer profitable. It just doesn't make economic sense because interest rates are too high or it's difficult for developers to raise capital,” he said.
And that's not the only obstacle: Anirban Basu, chief economist at Associated Builders and Contractors, said there are still post-pandemic woes to come.
“Supply chain issues have led to shortages of materials, which has caused prices to rise. There are also skilled labour issues, with a shortage of skilled construction workers, which is also contributing to higher costs,” he said.
All of this will put a damper on the housing market.
“You can't make love connections because there are people who want housing but in the current situation they can't afford what builders can provide. That's where we are,” Bass said.
He expects this downward trend to continue, and the most likely way to reverse it is for the Federal Reserve to cut interest rates.
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