Construction spending inches up, but economist warns the gains 'are not sustainable'

August 11, 2010

Patrick Newport

U.S. Economist

IHS Global Insight

 

Bottom Line

 

 

 

œ       Construction spending inched up 0.3% in March, the first increase in six months.

œ       Private construction was down 0.1%; public construction was up 1.1%.

œ       Single-family home construction dropped a whopping 8.6% (the 37th-straight monthly drop). Multi-family construction fell 1.1%.

œ       Private nonresidential construction increased 2.7%.

 

Outlook

 

Single-family construction dropped 8.6% after plummeting a record 11.0% in February. Going forward, the monthly drops will get smaller, since single-family housing starts, which have not changed in three months, are nearing a bottom—if they have not bottomed out yet. Multifamily construction fell 1.1% (6th straight monthly drop) and January and February's levels were revised down. Going forward, this sector faces steep headwinds because of tight credit conditions that builders face.

 

Nonresidential construction posted unexpectedly strong numbers in March, but these gains are unsustainable. Indeed, March's gains were in categories that have been overbuilt, such as commercial buildings (up 1.5%), educational buildings (up 1.3%), and manufacturing (up 2.9%). March's gains were likely from ongoing projects that were started when the outlook was brighter than it is today. According to the Advance GDP release, real spending on private nonresidential construction tumbled 44.2% in the first quarter, its largest quarterly percentage drop ever (data start in 1947). Based on March's construction numbers, the drop will be revised to about minus 42%. The collapse in real spending on structures was mainly due to excesses of recent years that will take several quarters to work off. Indeed, with so many factors combining to bring it down, we are not expecting this spending category to recover until the second half of 2010.

 

Public construction improved for the second straight month. However, this sector is also headed for rocky shores because state budgets are strained. Increased infrastructure spending will boost this sector in the future, but it will take time before these projects dent the numbers.

 

March's construction numbers were stronger than the BEA assume when it computed its initial estimate of first quarter real GDP. March's numbers will result in an upward revision to real GDP of about a quarter of a percent. According the Advance estimate, real GDP fell 6.1% in the first quarter of 2009.

         
 

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