Half a year ago, one sector in the US we thought we could count on to see booming in 2022 was construction. In January, residential and non-residential construction were growing rapidly at 18% and 4% y/y, and the $1.2 tn Infrastructure Bill was signed into law in November 2021 promising additional support to the sector.
Now, in the middle of 2022, the situation has changed quite dramatically, and we see some worrying signs for construction growth. With inflation reaching 8.6% y/y in May, the 30-year fixed mortgage rate jumped from 5.23% to 5.78% in the second week of June, marking the biggest one-week increase in 35 years. With the Fed signalling more aggressive tightening ahead, we can safely assume that mortgage rates have not yet peaked. This will soon negatively impact housing demand. Existing home sales already fell 3.4% in May, and more builders are reporting a decline in the number of potential buyers. Even more alarming, over the January to April 2022 period, construction material and labour costs were 26.7% and 5.5% higher than last year (Figure 1).
Meanwhile, the industrial economy is getting an additional boost from the $1.2 tn Infrastructure Investment and Jobs Act. Around half of this spending, including $550 bn in newly authorised spending, will go towards building new roads, bridges and other infrastructure projects. For construction it means additional spending on public construction projects. However, with construction costs rapidly rising, the sectoral impact of the Act will be substantially smaller than originally expected.
About 125 bps of further federal funds rate increases are already priced into markets for 2022. However, we expect the rate to exceed 3%, reaching 3.50% by the year-end. This may certainly be painful enough to curb the construction boom in the US. Half a year ago we expected the construction sector to grow 4.8% y/y in 2022. Our June forecast for construction annual growth this year is only 0.7% which – although still an expansion – hardly qualifies as a boom.
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