Smooth muscle guides morphogenesis of epithelia during development of several organs, including the mammalian lung. However, it remains unclear how airway smooth-muscle differentiation is spatiotemporally patterned and whether it originates from 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 distinct progenitors. Transcriptional variability correlates with sub-epithelial and sub-mesothelial mesenchymal compartments that are regulated by Wnt signaling. Live-imaging and tension sensors reveal patterned migratory behaviors and cortical forces in each compartment, and show that sub-epithelial mesenchyme gives rise to airway smooth muscle. Differentiation trajectory reconstruction reveals that cytoskeleton, adhesion, and Wnt signaling pathways are activated early in differentiation. Finally, we show that Wnt activation stimulates the earliest stages of differentiation and induces local accumulation of mesenchymal F-actin, which influences epithelial morphology. Our work provides the first single-cell view of pulmonary mesenchymal patterning during branching morphogenesis.