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Construction Spending Slips In February As Shrinking Demand, Soaring Costs, And Supply Delays Threaten Project Completion Dates And Finances

April 1, 2021

Both Nonresidential and Residential Spending Retreat from January Levels amid Extreme Winter Weather; Association Posts Inflation Alert to Aid Understanding of Squeeze on Nonresidential Construction Firms

Construction spending slumped in February as unseasonably severe weather hammered the industry and a decline in new projects squeezed nonresidential contractors experiencing rising costs and delivery times, according to an analysis of new federal construction spending data by the Associated General Contractors of America. The association posted a Construction Inflation Alert to inform project owners and government officials about the threat to project completion dates and contractors’ financial health.

“The downturn in February reflects both an unfavorable change from mild January weather and an ongoing decline in new nonresidential projects,” said Ken Simonson, the association’s chief economist. “Unfortunately, it will take more than mild weather to help nonresidential contractors overcome the multiple challenges of falling demand for many project types, steeply rising costs, and lengthening or uncertain delivery times for key materials.”

Construction spending in February totaled $1.52 trillion at a seasonally adjusted annual rate, a decrease of 0.8 percent from the pace in January. Although the overall total was 5.3 percent higher than in February 2020, the year-over-year gain was limited to residential construction, Simonson noted. That segment slipped 0.2 percent for the month but jumped 21 percent year-over-year. Meanwhile, combined private and public nonresidential spending declined 1.3 percent from January and 6.1 percent over 12 months.

Private nonresidential construction spending fell 1.0 percent from January to February and 9.7 percent since February 2020, with year-over-year decreases in all 11 subsegments. The largest private nonresidential category, power construction, retreated 9.7 percent year-over-year and 0.4 percent from January to February. Among the other large private nonresidential project types, commercial construction—comprising retail, warehouse and farm structures—slumped 7.1 percent year-over-year and 1.2 percent for the month. Manufacturing construction tumbled 10.4 percent from a year earlier despite a pickup of 0.3 percent in February. Office construction decreased 5.0 percent year-over-year and 0.5 percent in February.

Public construction spending dipped 0.9 percent year-over-year and 1.7 percent for the month. Among the largest segments, highway and street construction declined 1.0 percent from a year earlier and 0.6 percent for the month, while educational construction decreased 2.3 percent year-over-year and 3.2 percent in February. Spending on transportation facilities declined 2.3 percent over 12 months and 2.5 percent in February.

Association officials said that rising materials prices and unreliable delivery schedules are making it hard for firms to remain profitable as they have difficulty passing raising prices for construction work. They said that proposed new infrastructure projects will help boost demand for many types of construction projects. But they urged Washington officials to also take steps to address supply-chain challenges, including by ending tariffs on key materials like lumber and steel.

“Contractors are having a hard time finding work, and when they do, they are getting squeezed by rapidly rising materials prices,” said Stephen E. Sandherr, the association’s chief executive officer. “New infrastructure investments will certainly help with demand, but the industry also needs Washington to help address supply-chain problems and rising costs.”

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