- by New Deal democrat
It has become increasingly likely that the Boom (or maybe Bubble) in spending on the construction and operation of AI data centers may be the only thing that has kept the economy out of a recession. This morning’s release of both February and March monthly numbers for construction spending (thus bringing this metric almost completely up to date six months after the end of last autumn’s government shutdown) is more evidence for this proposition. That’s because, in the past I have used construction to help track the long leading sector of housing; and in the wake of the Inflation Reduction Act, plus “Liberation Day,” it has also been useful to track manufacturing. But now, via tracking construction of water supply and power, it is also a useful proxy for construction of AI data centers.
On a monthly basis, in March all but manufacturing construction were positive, but since the last report was for January, comparing the two month change is also significant. Here’s how total construction, and each of the above sectors, broke down in March (first column) as well as the combined February and March period (second column):
Total: +0.6% +0.1%
Residential: +1.6% +1.5%
Manufacturing: -1.1% -2.7%
Power: +0.2% +0.5%
Water supply: -3.4% -0.4%
In the below graph, I break out each of the above for the first three months of this year. But the above numbers are nominal. Measuring vs. the cost of construction materials is also important, and those are also supplied in the final line:
Deflated by the cost of materials, which rose 0.8% in March, only water supply and residential construction were positive. For the two month period including February, the costs of construction materials rose 2.1%, meaning in real terms *all* of the sectors were negative.
The importance of AI data center related spending also is apparent in the YoY% comparisons: nominally total construction was only up 1.6%, vs. a 6.0% increase in construction materials. Manufacturing was *down* -17.0% (thank you, tariffs!). Residential construction was a relative bright spot, up 3.5% (but still below the cost of materials). Only power, up 5.3%, and water supply, up 4.8%, fared better, but even those were negative in comparison with construction costs:
Notably, as shown in the graph below, in nominal terms even spending on water supply construction peaked last October, and total and residential construction spending peaked in December. Only power construction spending has continued to increase (but even that not in real terms, as discussed above):
And in real terms, with the exception of a brief rebound this past autumn, residential construction spending has been declining since May of 2024, although like other housing metrics, there are signs it may be bottoming out:
In other words, spending in the two leading sectors - housing and manufacturing - have been in decline for well over a year. If AI related spending rolls over as well, it is difficult to see how the US economy remains out of recession.
