A Return to Normal Construction Spending Could Boost GDP by 1.5%

Last week a number of companies in multiple industries all mentioned that they are seeing an uptick in construction spending.  Aside from Caterpillar’s positive comments, Union Pacific said that it saw strong volume of construction material on its rails, BB&T said that it was seeing stronger demand for construction loans, Brown and Brown said it saw increasing demand for construction project insurance and even Chipotle said that it is finding opportunities for stores in more newly built locations.

Since it is historically a late cycle industry, construction has been one of the last sectors of the economy that hasn’t seen a return to normalcy since the last recession.  It has been particularly depressed because over-construction was at the epicenter of the last recession.  Still, six years of under-building may be leading to pent up demand.

According to Census Bureau data, construction spending is currently running at 5.6% of GDP compared to an average level of 7.1% since 1993.  That implies that if construction spending were to rebound to more normalized levels it could boost GDP by an extra 1.5%.  That’s probably not enough to carry economic growth all by itself, but it’s not bad either.

Construction Spending as Percent of GDP

Source: Census Bureau