Construction MMI Flattens Out in July, Labor Shortage Affecting Spending

• July , 2016

The Construction MMI held steady at 66 in July, as spending remains stubbornly low during the traditionally strong East Coast construction season.

Construction spending during May reached a seasonally adjusted annual rate of $1,143.3 billion, 0.8% below the revised April estimate of $1,152.4 billion, but 2.8% above the May 2015 estimate of $1,112.2 billion, according to data from the U.S. Census Bureau. Construction spending in the first five months of this year, construction totaled $438.5 billion, which is 8.2% higher than the $405.4 billion for the same period in 2015.

It’s difficult to quantify the lack of spending increases in what outwardly looks like a robust U.S. construction sector.

Spending Struggles to Stand Pat

Residential construction was at a seasonally adjusted annual rate of $451.9 billion in May, virtually unchanged from the revised April estimate of $451.7 billion, while nonresidential construction was at a seasonally adjusted annual rate of $407.4 billion in May, a mere 0.7% dip from the revised April estimate of $410.1 billion.

Ken Simonson, chief economist at Associated General Contractors of America, a construction industry trade group, noted that the latest data affirms complaints that contractors are having an increasingly hard time finding skilled workers to hire.

“Mild winter weather in many regions early in 2016, followed by extreme rains in some locations in May, has probably distorted monthly spending patterns but shouldn’t mask the robust widespread growth in demand for construction so far this year,” Simonson said. “It appears there will be plenty of activity in the remainder of 2016 — if contractors can find the workers they need.”

We have, indeed, documented the lack of skilled labor in the U.S. market for more than two years now. Labor costs are increasing so much that they are outstripping the savingsmany general contractors had captured from low commodity prices for construction products. While it’s true that many are also cutting costs by using more efficient construction methods, the drop in spending is still highly concerning since most sectors look like they should be growing with strong demand and, supposedly, lots of design work on the boards.

Chinese Spending Grows

There is, however, good news from abroad. In China, the Caixin/Markit services purchasing managers’ index for June rose to 52.7 from 51.2 in May on a seasonally adjusted basis. Readings above 50 indicate an expansion on a monthly basis, while readings below signal contraction.

Beijing has fast-tracked planned infrastructure spending this year to boost growth, and a strong run-up in housing prices as buying restrictions were loosened helped turn around a slowdown in property development. Like many of our sub-indexes this month, it will be interesting to see what effect the U.K.’s vote to leave the European Union has on construction prices when markets have had a month to settle.