Looking at the latest construction spending report can be an informative exercise, despite the fact that the data lag other releases, because it bundles together various measures of construction activity for one comprehensive look. The latest report, released on May 2, revealed continued growth in construction spending. Private construction spending increased 8.5 percent on a year-over-year basis. The breakdown of growth by segment shown in chart 1 reveals that private residential (the sum of new single-family, multifamily, and residential improvements) and private nonresidential spending contributed almost equally to this increase (4.0 and 4.5 percent respectively).i
Growth in private residential and nonresidential spending from the year-earlier level has persisted since July 2011, but how does the level of spending compare to the previous cycle? The seasonally adjusted annual rate of private nonresidential spending has rebounded to a level just 1.8 percent below its previous peak. Private residential construction spending, on the other hand, remains 35.8 percent below its previous peak. With that said, after zooming out to look at spending over the entire horizon of the series and adjusting for inflation (see chart 2), it doesn't seem particularly wise to judge the health of construction spending relative to the past peak. In hindsight, the last peak was clearly an aberration, especially for residential spending.
Using this longer-running and inflation-adjusted time series to help put current spending in context, it's hard not to notice that the level of private nonresidential spending has surpassed the level seen in earlier peaks (the most recent peak excluded) while private residential spending now looks to be about on par with levels seen in earlier peaks. This surface-level comparison is a bit short-sighted, as this is not a mean-reverting time series. An upward trend in aggregate real construction spending seems perfectly reasonable as the population and economy grow over time.
Shifting focus to the dashed trend lines in chart 2, we see that spending on residential construction has yet to catch up with trend but is much closer than when compared with the previous peak, while spending on nonresidential construction is at a level that exceeds its trend.
Takeaways
Two high-level questions emerge after reviewing the latest construction spending data. First, does construction spending really provide a comprehensive look at construction? The construction spending data could confound the underlying trend because it reflects activity, costs, and timing of payment (for some categories). Data on activity (that is, square feet and units under construction) for all subcategories are not available, but charts 3 and 4 (below) provide some indication for the trend in residential and some categories of nonresidential construction activity.
The construction of single-family and multifamily units as well as the square footage under way for warehouse and office properties have all resumed upward trajectories. Because these measures of construction activity tell a consistent story with the spending data, they provide some reassurance that the costs aren't the primary driver of the growth in construction spending.
Second, does the recovery in real estate still have legs? This one is hard to say for certain but, taking the construction spending and construction activity data together, it seems fairly likely that there is still room for growth.
Jessica Dill, economic policy analysis specialist in the Atlanta Fed's research department
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i Private nonresidential spending is comprised of lodging, office, commercial, health care, educational, religious, amusement and recreation, transportation, communication, power, and manufacturing structures.