After factoring in the data just released by the U.S. Census Bureau, my estimate for growth in total construction spending in the U.S. in 2016 is a little over 4 percent when compared with the total from 2015. The data for 2016 will be updated and revised a few more times in the coming weeks, so this estimated pace of growth may go up or down a bit, but not by much. This follows a jump of 10 percent in total construction spending in 2015.
A deceleration in the annual growth rate of this magnitude is often an indicator of a continued deceleration, or even a negative growth rate in the near-term. But this time I expect the growth rate in the spending total to at least hold steady, or even accelerate moderately.
My forecast for 2017 calls for a rise of 5 percent. This is based on expectations of continued growth in the overall U.S. economy of between 2 and 2.5 percent. Be aware that at the present time, this forecast does not include any of the pro-growth initiatives being advanced by the Trump administration. I have no doubts that tax reform or fiscal stimulus in the form of expanded infrastructure spending will have a strong upwards effect on the growth rate in both construction spending and the overall economy, but I am just not sure Congress can get anything done in time for it to take effect in 2017.
So for now I am only factoring in steady, reliable, incremental growth in construction spending this year due to the continued moderate rate of expansion in the U.S. economy. Obviously this assumption could change as the year progresses, so I will happily revisit this forecast as early and as often as needed. As tempting and fashionable as it has become in recent weeks to branch into political punditry, I am resolved to maintain my discipline and stick to economics.
A breakdown of the data from 2016 shows that private construction spending increased by 6 percent while spending on publically financed projects actually declined by about 1 percent when compared with the previous year. Private spending accounts for about three-fourths of the total, so a gain in the private sector is usually the main driver of growth. My forecast is for a gain of at least 5 percent in private sector spending in 2017 with the gains spread evenly between the residential and non-residential segments.
Within the private sector, spending on residential projects accounts for a little more than half of the total. Overall, private residential spending increased by 5 percent last year, but the total spent on the subset of multi-family projects jumped by 17 percent. I expect the growth rate in the multi-family segment to moderate in 2017, due to a moderate decline in the number of new multi-family units started in 2016. But the longer-term trend of lower-than-usual home ownership rates will persist for the foreseeable future. Vacancy rates for rental units will remain low.
In the non-residential sector, total construction activity expanded by almost 8 percent in 2016. The strongest gains were posted in projects for offices (up 29 percent), lodging (up 27 percent), and amusement and recreation (up 22 percent). The largest category in terms of total spending is the commercial segment, and spending in this category expanded by a solid 9 percent. Spending on projects for manufacturing (a personal favorite of mine) declined by a modest 3 percent in 2016, but this followed a jump of more than 40 percent in 2015. So investment in manufacturing facilities remained at a respectable level, we just need to get the trend aimed upwards again. The odds appear favorable at this time, but as always, I will monitor this data closely.