Construction Spending: Drag on 3Q Growth

Bottom Line:   Construction spending fell again in August and was revised even lower for July as residential spending slowed sharply. There were positive revisions to the June data, mostly due to stronger non-residential construction, as already reflected in GDP reports.  But the first two months of the 3rd Quarter suggest construction will be a material drag on growth. The move in mortgage rates has crushed residential activity since late May, with spending in the sector down nearly 13% annualized in the three months ended in August. Nonresidenital construction, very weak throughout the pandemic, continues to recover modestly but is unlikely to provide enough boost to investment to offset the losses in residential. Overall, construction shifted from a tailwind to a headwind for economic growth in the 3rd Quarter and will likely remain a drag on growth for at least the remainder of the year and probably well into 2023.