Construction Spending

What Is Construction Spending?

Construction spending is an economic indicator that measures the amount of spending toward new construction. The U.S. Department of Commerce's Census Bureau releases the monthly Value of Construction Put in Place Survey (VIP), which looks at residential and non-residential construction in the private sector, as well as state and federal construction spending.

Understanding Construction Spending

Construction spending figures tend to have only a minimal effect on the financial markets. Still, the data can provide insight as to the economic growth of the U.S. as measured by Gross Domestic Product (GDP). GDP is a metric that shows the output of an economy by tracking the production of all goods and services. When GDP is rising, it typically coincides with an increase in consumer and business spending. Also, when the economy is growing, construction spending tends to rise. However, when an economy is slowing or experiencing negative growth—called a recession—construction spending tends to decline.

The Bureau of Economic Analysis (BEA) uses construction spending data directly when producing GDP statistics. Other government agencies and construction-related businesses use the data for economic forecasts, market research, and financial decision-making.

Housing Sector

Construction spending is a key economic indicator and residential construction, which includes the housing market, represents nearly 50% of total construction spending in the U.S.

For example, the health of the housing market can be measured, in part, by tracking new home construction, which tends to rise when consumers feel optimistic about their jobs and the surrounding economic conditions.

Housing starts are often tied to construction spending. Housing starts show the number of new construction projects that have begun in a particular month. Housing start statistics are released near the middle of each month by the U.S. Commerce Department.

Non-Residential Construction Spending

Commercial businesses also spend hundreds of billions of dollars per year on construction spending. Whether a company is building a new factory or a hotel chain, new hotels, the capital expenditures, or business investment, adds to the total of construction spending.

Commercial construction has a far-reaching impact on the economy, including adding jobs for contractors, software and technology firms, and banking since banks often finance the projects through commercial lending facilities.

How Construction Spending Is Tracked

For over 55 years, the U.S. Census Bureau has tracked monthly construction spending through the Value of Construction Put in Place Survey (VIP). The report provides monthly estimates of the total dollar value of construction work done in the U.S., whether by the private or public sector, and the type of construction.

The Bureau has conducted the survey it covers construction work done on new structures and those done as improvements to existing structures in both private and public sectors. The following data is included in the construction spending figures:

• Cost of labor and materials
• Cost of architectural and engineering work
• Overhead costs, which are management, sales, and marketing costs or those expenses not tied directly to the production or construction of a project
• Interest on loans or debt used to finance construction spending and taxes paid during the project
• Contractor’s profits

Data collection and estimation activities begin on the first day after the reference month and continue for about three weeks. Reported data and estimates are for activity taking place during the previous calendar month, and the survey has been conducted monthly since 1964. 

Construction Spending by the Government

Although construction spending is usually considered a private-sector venture, a significant amount of money can be allocated to the federal government's construction spending. As part of his overall economic plan, Biden plans to spend $2.4 trillion on infrastructure and energy to achieve net-zero emissions by 2050. The plan also includes significant investments in roads, bridges, water, electricity, green spaces, and universal broadband.

The proposed investments in construction spending include:

• The creation of smart roads, which use sensors and control devices to improve safety
• Investment in existing rail and trains to help cut down on pollution and commute times
• New construction rail lines in cities to create additional connected communities and improve bus lines
• Automobile infrastructure that supports electric vehicle charging stations
• Investments in upgrading four million buildings and weatherizing two million homes in the next four years
• Direct cash rebates and low-cost financing to upgrade electricity for residential homes to reduce energy bills
• New construction spending to create 1.5 million homes and housing units that are sustainable, meaning they use less energy and materials

Of course, any infrastructure spending programs will need to be approved and passed by the U.S. Congress. Whether Biden gets his agenda passed without any modifications or reductions by Congress remains to be seen.

Example of Construction Spending

As stated earlier, the two primary drivers of construction spending are residential and non-residential spending. The tables below contain a portion of the U.S. Census Bureau's report on construction spending in the U.S. for October 2020.

Residential

The recession in 2020, as a result of the COVID-19 pandemic, led to the Federal Reserve acting to boost the economy by reducing interest rates. The Fed's actions pushed mortgage rates lower, helping to boost the housing market as consumers rushed to buy homes to take advantage of cheap financing.

• From the table below, we can see that more than $1.4 trillion was spent on construction spending in October of 2020.
• Total residential construction spending was $646 billion.
• Single-unit housing spending was $324 billion.
• More than $90 billion was spent on multi-family units.
• Nearly 45% of all construction spending came from the housing sector in October 2020.

We can see the impact that low interest rates had on home building in the year-to-year growth rate. New residential construction spending grew by 14.60% in October 2020 versus the same month in 2019.

Non-Residential

Business spending on construction was $792 billion in October 2020 but represented a drop of 3.70% from 2019. Although a few sectors saw increases in spending, the majority did not, which demonstrates the impact of the recession.

The recreation, entertainment, and travel industries endured the biggest hit from the pandemic. 

• Construction spending in lodging, which includes hotels, was $26 billion—a 23% drop from the same month in 2019. 
• Amusement and recreation spending was $26 billion representing a 9.4% decline from one year earlier. 
• Office construction was down by 7.5% from 2019 with $80 billion dollars.
• Even the manufacturing sector experienced a 12% drop in construction spending with $70 billion dollars in October 2020.
• However, public safety saw an increase in construction spending by nearly 40% from 2019.