Economy Watch: Construction Spending Continues to Drop Because of Energy

By Dees Stribling, Contributing Editor

U.S. construction spending continued on a downward trajectory in March, at lease on a monthly basis, according to the Census Bureau on Friday. The drop was 0.6 percent in March compared with the revised February figure, representing an increase compared with the 0.1 percent monthly drop in February. Spending is still higher than it was a year ago, however—2 percent more than in March 2014. The drops look like a symptom of weaker residential and commercial real, but besides the fact that monthly fluctuations can be misleading, the construction picture is more complicated than that. Some commercial sectors are in fact seeing sharp increases in construction spending.

That’s certainly true on an annual basis for the office and lodging sectors. Compared with a year ago, construction spending for office properties was up 19.8 percent in March (and 2.2 percent for the month). Hotels, motels and other hospitality properties did even better, seeing a 22 percent increase for the year. Other kinds of commercial properties likewise turned in a healthy year-over-year increase in spending: 12.8 percent, though month-over-month it edged down 2.2 percent. The Census Bureau category “commercial” includes warehouse/distribution properties, but not manufacturing.

As it happens, since last year, spending on building manufacturing facilities increase just over 50 percent, the largest annual movement of any property type. Demand for U.S. manufactured goods has been healthy lately. But it might prove to be a transitory spike, since various industrial production indicators have come in weak lately. For example, the ISM manufacturing index didn’t move at all in March, and two of the major regional manufacturing surveys, the Empire State and Texas, were both weaker recently. One of the factors depressing manufacturing demand is the strong dollar, which depresses demand for American-made goods. Eventually (if the strength continues), that will also depress demand for new manufacturing facilities.

As for the overall drop lately in construction spending, the energy sector is still the major drag. Spending on “power” projects (as the bureau categories energy) was down 0.8 percent for the month in March, and a considerable 15.7 percent compared with a year earlier. Spending on power construction projects, which includes oil and gas exploration and refining facilities, peaked just before the latest contraction in the price of oil, in mid-2014. Since then, the energy industry has been reacting to the drop in prices as it always does, with a rational cut back on spending.