U.S. construction spending activity falls in May, residential construction activity likely to stabilize

U.S. construction spending was considerably softer than anticipated in May, while April data were upwardly revised. Sequentially, overall spending dropped 0.8 percent, as activity dropped in residential and non-residential sectors as well. On a year-on-year basis, construction spending dropped 1.5 percent, the softest reading since July 2011.

Most of the underperformance comes from the private residential sector, where activity has dropped on an annual basis since September 2018. However, growth in the non-residential sector also dropped in May, especially for construction in commercial, healthcare, power, and education structures. Residential construction softness could be traced to the deceleration in the housing market in 2018, but the slowing non-residential spending is more recent and implies that weakness is spreading in other parts of the economy, Barclays in a research report.

With respect to the residential sector, the softness in construction spending is viewed as part of a wider deceleration in the housing market last year that showed up in housing starts, home sales and slower home price appreciation.

“We think deteriorating home affordability and increasing mortgage interest rates helped to slow the housing market in 2018. Nevertheless, we expect residential construction activity to stabilize and not deteriorate further. Home affordability will likely improve, in our view, as modestly accelerating wage inflation and the continued pickup in employment should both support household incomes. In addition, the recent easing in mortgage interest rates should also act as a tailwind to housing demand”, added Barclays.

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