In June of this year, we made the case for becoming more cautious on the current economic environment. Part of the reasoning was related to indicators of residential investment. In this note we broaden our focus toward the greater post-COVID-19 pandemic construction boom that we’ve characterized as US fiscal-powered nominal growth fuel for the last two years. Its growth rate may finally be ebbing.
Private Tech Boom
One of the greatest charts that made the rounds in 2022 was the incredible surge in US private manufacturing construction expenditures. This torrent of spending was a result of the Infrastructure Investment and Jobs Act (IIJA), the Inflation Reduction Act (IRA) and CHIPS Act – either direct funding or tax incentives that created the greatest manufacturing construction boom of the last 30 years.
As shown in the nearby chart, the boom was focused entirely on the Computer/Electronic/Electrical sector of manufacturing. Peaking at a $72 billion (near four-fold increase) annual change in April 2023, the Tech sector’s construction value put in place appears to be now topping out at around $134 billion per month over the last few months.
Residential In Focus
Another important part of the construction boom has been housing. Since the housing cycle influences the consumer cycle and has been shown to coincide with the business cycle1, its indicators are always on our radar. We discussed the decline in housing starts and building permits reaching new post-pandemic lows back in June. This is translating to the rare occurrence of monthly single family and multi-family units under construction falling year-over-year at the same time. As shown in the nearby chart, this signal appears to coincide with revised job losses in residential construction and preceded the last three (non-pandemic related) US economic recessions.
However, the US isn’t losing residential construction jobs even as the labor market has started its normalization off an unemployment rate trough. Perhaps the homebuilders, whose equities are up more than double the return of the S&P 500 Index over the last two years, have been able to buy down mortgage rates for homebuyers and thus sustain the activity needed to keep jobs. Anecdotal and data-driven evidence points in this direction. Monthly new home sales are increasing at the long-term average pace while existing home sales are still at global financial crisis (GFC) lows. The Federal Reserve can help alleviate the pressure here, but the key question is the timing and magnitude of rate cuts and how prices react when liquidity is reintroduced.
Unfortunately, the Job Openings and Labor Turnover Survey (JOLTS) reports from the last six months have seen construction job openings falling sharply. Openings are now at 248 thousand, down from their 452 thousand all-time peak in February. As shown in the nearby chart, these severe moves in openings appear to historically lead or coincide with construction job losses.
Local Government Fiscal Cliff
If you’ve been around any metropolitan areas or townships, you may have noticed a lot of state and local construction over the last couple of years. As shown in the nearby chart, the rate of change of total US state and local construction spending hit a new high in 2023, nearly doubling the previous high rate of change achieved in 2007 and 2020. This sector is also an enormous contributor to construction jobs and growth.
But it can’t last forever. According to the 2024 Fiscal Survey of States run by the National Association of State Budget Officers, general fund spending is on track to grow 14.4% in fiscal 2024, “largely driven by one-time expenditures of prior-year surplus funds”, following an annual increase of 7.2% in 2023. In addition, recommended budgets for fiscal 2025 call for a 6.2% decrease compared to estimated levels for fiscal 2024.2
Conclusion
US pandemic policy proved to be a significant contributor to US growth and inflationary conditions over the years immediately following the COVID-19 pandemic. Tracking the potent US fiscal expenditures closely has helped contextualize the nominal growth environment we still find ourselves in 2024, but signals for continued growth in the construction boom show early stages fading. This has an implication for construction jobs, which in turn tend to lead the business cycle. Given the recent softening of the labor market, we believe these dynamics are paramount for gauging the probability of economic recession and managing client portfolio risk.
Important Disclosures & Definitions
1 Leamer, Edward E. (September 2007). Housing IS the Business Cycle. NBER Working Paper No. 13428, National Bureau of Economic Research.
2 National Association of State Budget Officers. (2024). The Fiscal Survey of States: Spring 2024. Washington, DC: National Association of State Budget Officers.
S&P 500 Index: widely regarded as the best single gauge of large-cap US equities. The index includes 500 leading companies and covers approximately 80% of available market capitalization. One may not invest directly in an index.
AAI000758 09/17/2025
