Construction Is Booming!

This is an excerpt from the Yardeni Research December 5. 2023 Morning Briefing.

The US economy has been remarkably resilient in the face of the Fed’s aggressive tightening of monetary policy since early last year. One of the sectors that accounts for that resilience is the construction industry. In the past, rising interest rates always depressed construction, which exacerbated the resulting recessions (Fig. 1 and Fig. 2). This time, the weakness in residential construction has been offset by relatively strong private nonresidential and public construction (Fig. 3 and Fig. 4). Here’s more:

(1) Private residential construction. While single-family housing construction has been weak, that weakness has partially been offset by record spending on multi-family construction and near-record spending on home improvements, which are almost as large as spending on single-family construction (Fig. 5 and Fig. 6).

(2) Private nonresidential construction. Many of the components of nonresidential construction spending are at or near their record highs, including education, highway & street, amusement & recreation, commercial, and office (Fig. 7 and Fig. 8). The strength of the last two categories is surprising. They might weaken with a lag (maybe in 2024) in response to the tightening of credit conditions during 2022 and 2023. But for now, they are a source of economic strength.

Off the charts is construction spending on manufacturing facilities because of the increase in onshoring owing to federal incentives (Fig. 9). In current dollars, it is up a whopping 71.6% and 136.8% on one-year and two-year bases.

(3) Public construction. Most of the major categories of public construction spending are also at or near their record highs (Fig. 10). Here are their y/y growth rates through October: power (55.9%), sewage & waste disposal (27.2), office (18.1), education (16.5), water supply (15.3), highway & street (12.7), and transportation (8.6).

(4) Construction employment. Payroll employment in the construction industry occasionally has been a leading economic indicator and often has been a coincident indicator of the business cycle. So it tends to fall during recessions. There’s no sign of a recession in construction employment currently. It has been rising to fresh record highs since May 2022 (Fig. 11). Employment is strong across all the major building trades, including residential, nonresidential, and heavy & civil engineering (Fig. 12).

(5) Related stock indexes. Since the October 27 low in the S&P 500, the stock price index of its Real Estate sector has recovered nicely. So have the stock price indexes of the various S&P 500 REITs (Fig. 13). Here is their performance derby since then through Friday’s close: Office (26.1%), Telecom Tower (25.1), Industrial (21.5), Single-Family Residential (18.2), Self-Storage (17.9), Hotel & Resort (17.7), Real Estate sector (17.3), Retail (16.5), Broadline (15.1), and Data Center (15.1).

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