TWIA Commercial Property & Casualty
High interest rates, tight credit conditions stall projects
Aug
Dive Brief:
- Nonresidential construction spending ticked down 0.2% in June to a seasonally adjusted annual rate of $1.21 trillion, according to Associated Builders and Contractors’ analysis of U.S. Census Bureau data released Thursday.
- Spending dropped in almost half of nonresidential subcategories in June. Both public and private spending fell 0.4% and 0.1%, respectively. That decrease stems from higher interest rates, tighter credit conditions and a softening economy, said Anirban Basu, ABC chief economist, in the release.
- Despite the recent spending tickdown, many contractors remain upbeat and expect revenue growth over the next six months, according to ABC. However, with interest rates still elevated, Basu said “many projects are being put on hold, limiting construction starts, suppressing backlog and perhaps eventually eroding current contractor confidence.”
Dive Insight:
While multibillion-dollar megaprojects across the nation continue to grab headlines, overall nonresidential construction spending appears to have entered a period of stagnation, said Basu.
For example, despite a substantial 19.1% increase year over year, spending on manufacturing projects in June posted almost no change in June, ticking up 0.1%, according to ABC. Office construction spending remained flat, while highway and street spending ticked down 0.4% over the month.
Even overall public nonresidential construction, buoyed by government dollars, ticked down 0.4% in June. These limited month-over-month changes across the board, even in sectors with strong annual growth, reflect the impact of a high cost environment, said Basu.
“It’s not a good thing,” he said. “The flattening of momentum has been apparent for the better part of a year, but the impact of higher interest rates, tighter credit conditions and a softening economy is increasingly apparent in the most recent data, which indicate that aggregate nonresidential construction spending is in decline.”
The Federal Reserve opted to hold interest rates steady during its meeting on July 31, while signaling the possibility of a rate cut in September. That would help alleviate some of those current economic pressures, according to economists.
Other bright spots in the report also suggest construction activity should continue to grow despite the dip in construction spending in June, said Ken Simonson, chief economist at the Associated General Contractors of America, in its own spending release.
For example, spending on data center construction jumped 1.7% in June and has been climbing for 13 straight months, according to the AGC report. Year-over-year growth in the sector reached 62.4% in June as well.
Along with data centers, Simonson expects increased spending on manufacturing projects and several infrastructure segments.
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