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Construction Spending Declines 1.4% in February

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Last months’ upward revisions to construction spending were more than reversed and February spending fell 1.4%, mostly due to an implausible drop in residential remodeling. Forthcoming revisions will likely raise the spending total in line with recent gains in construction jobs and reasonably steady construction starts. But construction activity has sagged since November under pressure from collapsing public budgets and a pullback in consumer income and confidence.

Last months’ upward revisions to construction spending were more than reversed and February spending fell 1.4%, mostly due to an implausible drop in residential remodeling. Forthcoming revisions will likely raise the spending total in line with recent gains in construction jobs and reasonably steady construction starts. But construction activity has sagged since November under pressure from collapsing public budgets and a pullback in consumer income and confidence in the face of CPI inflation rising to a nearly 6% annual pace in the last six months. Sustained recovery has again been delayed.

Construction spending estimates are notoriously unreliable during the winter, especially during a severe winter when weather interruptions are more frequent than long term average seasonal adjustment factors assume. The final chapter has not yet been written on construction spending trends during this past winter. Separately, annual revisions to construction spending due in May will likely reduce the level of total construction spending last year and show a deeper recession which will also quicken the pace of the initial recovery.

A significant share of the recent decline was a real cutback in public construction, especially buildings financed by municipal governments. This trend will persist well into 2011 as state and local governments are forced to balance their budgets with depressed revenues, exhausted reserves and end of federal stimulus funds on June 30th. The proposed budgets for FY 2011-12 are spending cuts from the current budget year in almost all states.

The Reed Construction Data spending forecast now projects a 2.1% decline in 2011 although spending will be rising steadily before mid-year. The delayed recovery early in 2011 pushes some work into next year raising the gain to 13.9%.

U.S. Total Construction Spending
(billions of U.S. current dollars – annual figures)

  Actual Forecast
  2006 2007 2008 2009 2010 2011 2012
New Residential (% change 476.9 362.3 238.2 141.4 135.8 141.5 191.0
is year vs previous year) -1.7% -24.0% -34.2% -40.6% -4.0% 4.2% 34.9%
Residential Improvements* 145.9 140.2 120.7 119.3 116.8 117.7 134.6
  11.2% -3.9% -13.9% -1.1% -2.1% 0.8% 14.4%
Non-residential Building 339.3 402.8 437.4 379.7 291.4 264.8 300.2
  12.4% 18.7% 8.6% -13.2% -23.2% -9.1% 13.4%
Non-building 207.4 247.8 270.9 270.9 269.8 272.9 281.9
   (heavy engineering) 12.5% 19.5% 9.3% 1.0% -1.4% 1.1% 3.3%
Total 1169.4 1153.0 1067.2 914.1 813.8 796.9 907.7
  6.1% -1.4% -7.4% -14.3% -11.0% -2.1% 13.9%

*Residential Improvements include remodeling, renovation and replacement work.
Actuals: U.S. Census Bureau, Department of Commerce.
Forecasts and table: Reed Construction Data.

by Jim Haughey

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