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Key Takeaways
- Construction spending was lower than in the previous month for the first time in a year and a half.
- The Federal Reserve has pushed its key interest rate up to a 23-year high and has kept it there for the past 12 months.
- High interest rates designed to slow spending and in turn, tame inflation seem to be having their desired impact on the construction sector.
Construction spending was lower than the previous month for the first time in a year and a half, as high interest rates have taken a toll.
Entities decreased their spending on both residential and commercial building projects in May, according to a report from the Census Bureau Monday. If spending were to remain at its May rate for the whole year, construction expenditures would total $2.14 trillion, a 0.1% decline from the month prior.
This drop surprised economists, who expected a 0.2% increase, according to a survey from the Wall Street Journal and Dow Jones Newswires.
“Although the construction market as a whole has navigated the higher interest rate environment relatively well thus far, the restrictive effects of tight monetary policy are becoming increasingly apparent across the industry,” wrote Wells Fargo economists Charlie Dougherty and Jackie Benson.
The Federal Reserve has raised its key interest rate to a 23-year high and kept it there for nearly 12 months in a fight against inflation. The high fed funds rate is designed to make borrowing more expensive for businesses and consumers to discourage spending and decrease price pressures.
That seems to be the case in the construction industry, where both residential and commercial spending fell in May.
Housing Spending Suffered Under High Mortgage Rates
There was 0.2% less spending on housing construction in May than in April, the report showed. The housing market has been stifled by high mortgage rates that are discouraging would-be buyers from entering the market and leaving builders pessimistic about the near future.
“Incoming inflation data should pave the way for the Federal Reserve to begin cutting interest rates in September, which will allow mortgage rates to sustainably fall and residential investment to bounce back in the coming quarters,” wrote Oxford Economics’ Bernard Yaros.
Lower spending on office, health care and religious buildings helped push non-residential construction 0.3% below last month’s annualized totals. An increase in total public construction, including on educational buildings and highway projects, didn’t offset the declines in private-sector spending.