Smooth muscle guides the morphogenesis of several epithelia during organogenesis, including the mammalian airways. However, it remains unclear how airway smooth muscle differentiation is spatiotemporally patterned and whether it originates from transcriptionally distinct mesenchymal progenitors. Using single-cell RNA-sequencing of embryonic mouse lungs, we show that the pulmonary mesenchyme contains a continuum of cell identities, but no transcriptionally distinct progenitors. Transcriptional variability correlates with spatially distinct sub-epithelial and sub-mesothelial mesenchymal compartments that are regulated by Wnt signaling. Live-imaging and tension-sensors reveal compartment-specific migratory behaviors and cortical forces and show that sub-epithelial mesenchyme contributes to airway smooth muscle. Reconstructing differentiation trajectories reveals early activation of cytoskeletal and Wnt signaling genes. Consistently, Wnt activation induces the earliest stages of smooth muscle differentiation and local accumulation of mesenchymal F-actin, which influences epithelial morphology. Our single-cell approach uncovers the principles of pulmonary mesenchymal patterning and identifies a morphogenetically active mesenchymal layer that sculpts the airway epithelium.