Construction spending unexpectedly rose 0.8% m/m in April, largely above consensus expectations for a 1.5% decline. The upward surprise was once again in private nonresidential construction spending, which rose 1.8%, marking the third consecutive monthly gain. The increase was driven by a jump in spending on power, communication, and manufacturing structures. This more than offset a decline in construction of commercial real estate and office buildings. We continue to argue that this increase in nonresidential construction spending is not sustainable and expect a downturn in the nonresidential construction sector over the next several quarters. Nevertheless, the gain over the past few months kicks off 2Q to a healthy start, suggesting nonresidential investment in structures will decline by a small amount, or even increase, in 2Q after a record decline in 1Q .

Construction spending was also boosted by a surge in spending on home improvements, which offset a decline in construction of new homes. This left total private residential construction spending up 0.7%. Spending on new construction has plunged 75% from the peak while home improvement expenditures has held roughly steady over the same period.

The stronger-than-expected construction spending report in April puts upside risk to market forecasts for nonresidential and residential construction spending in 2Q.