Single-Family Drove December Construction Losses

Construction spending fell 0.4% in December, missing expectations; November data were revised higher. Both private and public spending fell during the month. Residential investment weighed on growth toward the end of the year. In contrast, commercial investment and public infrastructure spending provided a boost to GDP in the fourth quarter.

Spending on construction ended 2022 at $1.79 trillion, a 10.2% jump from 2021. According to the producer price index (PPI), the prices of inputs for construction were up 7.2% by the end of the year; rising prices for fuel, cement and other building materials were partially offset by falling costs of lumber, steel and iron. Some commodity prices started the new year in hot territory; high prices, supply chain problems and a shortage of workers will remain concerns for builders in 2023.  

Spending on single-family home construction by the private sector continued to free fall in December, with spending slipping to the lowest level in two years. Builders have been feeling the loss in demand due to rapidly rising mortgage rates and still-hot home prices. Mortgage applications to purchase a home have moved up in recent weeks but are still significantly below year-ago levels. Many would-be buyers are waiting on the sidelines for both prices and rates to fall to start looking for a new home. The demographic tailwinds are in builders’ favor, but it is not a buyer’s market just yet. Affordability remains a hurdle; more buyers are offering below the asking price.

Spending on multifamily home construction rose 3.2% in December, a slight slowdown from November spending, but still 20.7% higher than this time last year. Multifamily projects respond differently to changing mortgage rates and prices and could continue to show strength in the first half of 2023 while the single-family market has yet to recover. Apartment vacancy rates rose at the start of 2023, which tend to lead to a fall in rents, especially in some of the hotter markets in the country. Falling rents will impact the pipeline for new multifamily projects. At the end of 2022, the backlog of multifamily projects exceeded the previous peak of 1973.

Private, nonresidential construction spending fell 0.5% in December after seven consecutive months of growth. Manufacturing infrastructure spending, one of the largest components of nonresidential construction, fell 2.2% during the month after climbing to record levels in November. Investments in manufacturing of chips, batteries and green energy initiatives popped in 2022 and are expected to hold up in 2023 as incentives for firms to invest in manufacturing are in place. Spending on warehouse and data center infrastructure projects is expected to slow from the strong pace seen in the past few years.

Public construction spending fell 0.4% as most segments experienced spending shortfalls. Public sector spending mostly occurs at the state and local levels, which are expected to grow in 2023 as states and municipalities invest revenue windfalls into infrastructure. On the federal level, spending fell 4% in December, but is also expected to grow in 2023 when infrastructure spending bills are put to work. 

Bottom Line:

Construction spending ended the year above prior year levels, but much of the growth is attributed to the rising costs of inputs and labor. In 2023, builders remain optimistic about public, nonresidential projects, many of which are funded by federal and state infrastructure spending. Significant shortages of workers and materials price pressures will continue to weigh on builders as they shift their focus from residential projects to commercial and public infrastructure projects.