Commentary Directory
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- A Strong March Leads to a Surge in Chinese GDP in Q1 2023
- Durable Goods Retail Sales Suffer from High Interest Rates and Wary Consumers
- Choppy GDP Means UK Should Avoid Q1 Recession
- Japanese Consumer Confidence Jumps to Highest Level in Over a Year
- The End of Summer Sees the End of Disinflation in Europe
- Labor Market Indicators are Starting to Unify on Easing in Hiring
- Inflation and Tight Financial Conditions Weigh on the German Consumer
- Euro Area Money Supply Contracts for the First Time Since 2010
- Dismal Economic Data Out of Germany
- Core Durable Goods New Orders See Gentle Uptrend in July
- More UK Data Pointing to Q3 Decline
- Whispers of a UK Contraction in Q3
- Japan's Core Inflation Resumes Uptrend in July
- Early July Economic Data Leads to a Sharp Increase in Q3 Growth Expectations
- UK CPI: Energy Inflation Crashes but Services Inflation is Still Sticky
- China's Weak Start to Q3 Means More PBoC Easing
- A Breather for the Eurozone as Inflation Hits Two-Year Low
- Germany's September CPI Report: A Clearer Picture of Inflation Trends
- US Manufacturing Demonstrates Resilience Amidst Volatility in August
- The ECB Prepares to Address Excess Liquidity Through the MRR
- Bank of Japan is Too Optimistic on Inflation
- The Bank of England Pauses in a Near Split Decision
- UK Inflation August Update: A Precursor to the Bank of England's Announcement
- Housing Starts Tumble in August Amid Rising Mortgage Rates
- US Retail Sales Grow at Fastest Monthly Rate Since the Start of the Year
- US Consumer Prices Surge in August Driven by Energy Costs
- August NFIB Survey Showed a Tough Environment for Small Businesses
- All Signs Point to a Weaker Labor Market in August
- Chinese CPI Trying to Buck the Deflation Trend
- Energy Prices Rise but the Core Disinflationary Trend is Maintained in September
- PPI's Quiet Rise and the Energy Elephant in the Room
- Small Businesses Grapple with Inflation and Financial Strain in September
- A Wacky September Jobs Report Shows Strong Labor Market
- A Look at the Fragile US Labor Market Ahead of the Nonfarm Payrolls Report
- Thoughts on GME and This Week in the Stock Market
- Record Home Price Levels Point to Strength in Post-Pandemic Economy
- The Stock Market Looks Overvalued, but It's Probably Not
- China GDP Growth Surpasses Expectations
- President-elect Joe Biden Introduces His "American Rescue Plan"
- Political Polarization Intensifies with Another Impeachment Along Party Lines
- Metal Demand Has a Bright Future in 2021 and Beyond
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- Civil Unrest, A Rising Threat to the 2021 Economy
- What's in the $900 Billion Relief Plan?
Non-Residential Construction Soft in the Pandemic Economy
Jacob Hess
February 02, 2021
- Construction
- Economy
Construction spending is an important economic indicator that is especially sensitive to fluctuations in the business cycle. Since construction projects typically take time, the decision about whether or not to move forward with one incorporates a firm's view of future prospects of economic growth. Construction spending is typically broken down into residential and non-residential construction, the latter including pretty much anything that is not a home or an apartment. As one would expect, the COVID-19 pandemic has had its unique impact on the indicator in 2020.
The Census Bureau released its report on construction spending for December 2020 on the first day of the new month. Overall, spending grew in the month, up 1.0% to $1.490 billion. That makes for an annual increase of 5.7% in 2020. The growth breaks down into two diverging trends in residential and non-residential construction with residential up 3.1% on the month and 20.7% year over year and non-residential down -0.8% on the month and -4.8% year over year. As pointed out in a previous article, the real estate market has been surprisingly strong throughout the COVID-19 pandemic, and it shows in this report. The need for new homes is the primary driver of construction spending at the moment.

Non-residential spending, on the other hand, has lagged quite significantly. The dip has been strongest in manufacturing (-17.5%), lodging (-24.0%), amusement and recreation (-15.6%), and power (-11.1%). As expected, several of these industries have been impacted by lockdowns. Year over year growth has slowed to the largest decline since May 2011. It's not a surprise. Capacity utilization has barely returned to pre-COVID-19 levels, and millions of people are still unemployed or on a prolonged furlough.
ConstructionConnect documents the decline in its report on construction starts. In 2020, the organization found a -31.9% drop in non-residential construction starts much lower than the drop of -18.3% in total construction starts. The report acknowledges the effects of lockdowns closing down construction sites but insists that "economic uncertainty leading to cuts to capital expenditures and tight state and local budgets" was the primary driver. In particular, the report points out steep declines in industrial and commercial sectors.
Despite an end to the pandemic in view, ConstructionConnect does not forecast a V-shaped recovery in non-residential construction. In 2021, its projection sits at 8.6% "a tepid decline given the depth of the decline in 2020." For certain industries, its projections are highly pessimistic. Retail construction starts are not forecasted to return to pre-pandemic levels until 2023, and office construction starts not until 2025. Estimates for manufacturing starts, a bit more optimistically, are expected to rebound at a faster pace to 2021 but not to pre-pandemic levels
It's interesting to note that this contraction has occurred while interest rates are at the lowest they've ever been, suggesting the downturn is being exacerbated by demand rather than capital availability. From an ROI perspective, many firms likely do not see investments in new buildings as an effective way to make enough return to cover the cost of capital even if the cost of capital is very low. There are several trends across different industries causing this (teleworking, eCommerce, etc.), but most find a commonality in digitization and the power of the internet.
At the moment, it appears that non-residential construction spending is set for a soft 2021 coming off of a steep decline in 2020. The structural changes in the economy brought on by the pandemic are likely to embed themselves more permanently especially for the industries most affected like retail and office construction. These unique changes might turn out to be pretty lasting if that is the case.