Why Was Construction Spending So Weak in May?

Source: Thinkstock

Source: Thinkstock

Some sectors of the economy are apparently still recovering from the impact of the Polar Vortex that brought the coldest winter in four years to U.S. Even as the economy is set to bounce back to a more normal growth trajectory in the second-quarter, spending on construction activities, for example, has shown only a cautious increase.

Construction spending in May advanced a paltry 0.1 percent to $956.1 billion, according to data released by the Census Bureau. This was in spite of healthy month-on-month rise in spending on non-residential and public construction. Spending on non-residential construction rose 1.1 percent in May to $328 billion and total public construction spending was up 1 percent to $273.3 billion.

The major culprit for the drag in the headline number has been reduced spending on home building, which contracted 1.5 percent to $355 billion in May on a seasonally adjusted basis. Spending on new single family homes were down 1.4 percent to $187.5 billion from $190.1 billion in May.

It is unlikely that we will see a rise in such spending unless demand in the housing market picks up. Overall weakness in the economy, higher mortgage rates, rising home prices, and relative weakness in the job markets have kept people away from buying homes. The median price of existing home rose 11.5 percent last year.

Earlier this month, the Mortgage Bankers Association (MBA) revised its forecast for new and existing home sales in 2014 to 4.83 million, a decline of 4.7 percent from 2013. Forecasts for mortgage lending volume for purchases was lowered to $595 billion, an 8.7 percent decrease and the first south bound revision in three years. According to the MBA, U.S. 30-year fixed mortgage rates may average 4.5 percent, up from 4 percent last year.

Gross domestic product in the first-quarter contracted 2.9 percent, the steepest since the financial crisis with sectors like construction and housing being hit the hardest. However, even though economy is ready to rebound in the second-quarter, the economic growth that we are seeing is essentially generating low paying jobs, which does not solve the problem of access to housing because of low affordability. In May, payrolls increased by more than 200,000 for fourth straight month, according to Labor department data. But this growth has come in areas like nursing home orderlies and temporary office jobs.

“Broader assessment of indicators suggests that underutilization in the labor market remains significant,” Federal Reserve Chair Janet Yellen said at a June 18 press conference. Improvement in the labor market is a prerequisite for the housing market to significantly recover. Until then, as the Fed argues, the housing recovery may remain slow.

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