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Measuring it properly can be very tricky. Because the CPI focuses on consumption, it considers housing as a service that people use, as opposed to an investment good, and only incorporates the price of that service into the index. Unfortunately, the price of shelter services for homeowners is hard to measure because the price cannot simply be read off a price tag. The price must be estimated, and there is no single best way. The current measure uses market rents, which assumes renters and owners face similar price dynamics. In addition, rents often change on an annual schedule, which can result in the well-documented lag between the CPI measure and price indexes for houses and rental units.

Despite these challenges, the CPI can still be useful for getting a sense of how prices have changed for housing. The cost of shelter has increased 7% year over year. While that isn’t the biggest percentage change that we’ll look at, it is being applied to the largest expenditure that consumers face—roughly 21% of the total monthly budget on average. As a result, we recently saw a contraction in residential investment.

What do these consumer indicators mean for commercial construction? While not directly tied, there is some degree of correlation between construction spending and consumer spending. As previously mentioned, consumer spending makes up a very large part of our economy and as spending goes up— increasing GDP—we often see a rise in construction spending. In fact, when the quarterly gain in spending is greater than 2% year over year, typically construction spending often sees percentage gains more than double consumer spending gains.

So what’s driving this relationship? In this case, it is likely that a rising tide lifts all boats; when consumer spending increases, it signals an aggregate increase in demand across other sectors, even nonresidential construction. When consumer spending decreases, we often see a pullback in demand across those sectors as well. If businesses are a main driver for a construction starts and the overall level of demand is determined by consumers, that means when consumers aren’t demanding as much, the business won’t need the new office building or infrastructure or factory, etc.

Increases in consumer spending are almost always a boon for the construction industry. However, just like an overgrown forest can benefit from occasional fires clearing out the underbrush and debris, the construction industry can benefit in the long-term from a cooled-off labor market and price resetting, improving their ability to hire and retain workers and ultimately offer a better product.

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