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Construction spending falls for 4th straight month

Disappointing Numbers are a Preview of Things to Come

Patrick Newport, Global Insight

March 3, 2008

Building Design and Construction

 Construction spending fell 1.7% in January, the fourth straight monthly drop.
 Private and public construction fell 2.2% and 0.2%, respectively.

  Single-family construction dropped by more than 5% for the third straight month.

 Multi-family units dropped for the 14^th month in a row.
   Private nonresidential construction dropped for only the second time in 31 months.    
Public construction fell for the second straight month.

  The Bureau of Economic Analysis will revise fourth-quarter GDP down by $4.2 billion (annualized), reducing real growth by 0.15%, based on January's construction numbers.

 

 

Outlook

 

Single-family construction dropped by more than 5% for the third straight month. The latest housing starts and housing permits numbers point to similar-sized drops over the next two to three months. Spending on multi-family units dropped for the 14^th month in a row, and was down 18.6% from a year earlier. Global Insight expects residential investment to chop real GDP growth by 1.6% in the first quarter of 2008, and by 1.1 percent in the second quarter. The bite from housing will get progressively smaller afterward, however. Indeed, residential investment will make a small contribution to growth in 2009.

 

Private nonresidential construction dropped for only the second time in 31 months. On top of this, revisions shaved December's gain to 0.4% (previously 1.3%). The drop in private nonresidential construction may be a sigh of things to come. Its recent growth rates were unsustainable. Indeed, we had been expecting this sector to contract in 2008 because of the housing slowdown (fewer homes require fewer stores, restaurants, gas stations, etc). But now we are expecting an even larger contraction because of the credit crunch. In its January Survey of Bank Loan Officers, the Federal Reserve reported that a record 80% of banks raised standards on commercial property loans over the previous three months. According to the survey, one-third of the responding banks reported tightening their standards on commercial and industrial loans, while two-fifths said they widened spreads of interest rates over their cost of funds.

 

Construction spending in January was down only 3.3% from a year earlier, as strong gains from public and private nonresidential construction have mostly offset the huge drag from housing. This is about to change. Global Insight expects all three categories to contract through most of 2008. January's disappointing numbers are a preview of things to come.

© 2009, Reed Business Information, a division of Reed Elsevier Inc. All Rights Reserved.

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