Key Takeaways
Construction spending fell month-on-month for the first time in a year and a half. The Federal Reserve raised its key interest rate to its highest level in 23 years and has maintained it there for the past 12 months. Higher interest rates, designed to slow spending and thus curb inflation, appear to be having the desired effect on the construction sector.
Construction spending fell from the previous month for the first time in a year and a half due to high interest rates.
Spending on residential and commercial building construction projects fell in May, according to a report released by the Census Bureau on Monday. If spending remained at May levels for the rest of the year, construction spending would have totaled $2.14 trillion, a 0.1% decrease from the previous month.
The drop surprised economists, who had expected a 0.2 percent increase, according to a Wall Street Journal/Dow Jones Economic News survey.
“While the construction market as a whole has weathered the high interest rate environment relatively well so far, the constraining effects of tightening monetary policy are becoming increasingly evident across the industry,” Wells Fargo economists Charlie Dougherty and Jackie Benson wrote.
The Federal Reserve has raised its key interest rate to its highest level in 23 years and kept it there for nearly 12 months to combat inflation. The high federal funds rate is intended to make borrowing more expensive for businesses and consumers, discouraging spending and reducing price pressures.
A similar trend appears to be emerging in the construction industry, with spending on both residential and commercial property declining in May.
Higher mortgage rates dampen housing spending
Spending on residential construction fell 0.2% in May from April, according to the report. The housing market has been stymied by high mortgage rates, which have discouraged would-be buyers from entering the market and made builders pessimistic about the near future.
“Upcoming inflation data should pave the way for the Federal Reserve to start cutting interest rates in September, which would lead to a sustained decline in mortgage rates and a recovery in housing investment in the coming quarters,” wrote Bernard Jarosz of Oxford Economics.
Nonresidential construction fell 0.3% from the previous month's annualized total, driven by lower spending on office, health care and religious facilities. Increases in total public construction, including education facilities and highway projects, more than offset the decline in private sector spending.