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Construction Spending Outlook Worsens

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Reed Construction Data has reduced the construction spending forecast for 2011-13 based on a series of negative developments in the last few weeks. The forecast for 2011 is for a 4.8% decline, previously a 4.2% decline. Expansion in 2012 has been cut to 4.8% from 10.5%. Expansion in 2013 is now expected to be 10.2%, down from 14.4%. The risk of a recession in the next twelve months has now risen to at least 25%.

Reed Construction Data has reduced the construction spending forecast for 2011-13 based on a series of negative developments in the last few weeks. The forecast for 2011 is for a 4.8% decline, previously a 4.2% decline. Expansion in 2012 has been cut to 4.8% from 10.5%. Expansion in 2013 is now expected to be 10.2%, down from 14.4%. The risk of a recession in the next twelve months has now risen to at least 25%. An alternate construction spending forecast that assumes a short, shallow recession will be posted in a few days.

The weaker outlook is due to these developments:

  1. Surprisingly low 2nd quarter economic growth in North America, Europe and Asia
  2. A worsened public debt problem in Europe with very high borrowing costs spreading to Spain and Italy
  3. The redevelopment of strains in the financial system with banks becoming wary of interbank lending and needing liquidity from already overextended central banks
  4. A sharp drop in spending confidence in the US on the realization that Washington has no credible plan to deal with either short-term high employment of long-term high debt

Together these developments limit US GDP growth through 2012 to 1.5-2.0% and 2013 GDP growth to improve, but still exhibit sub-par growth for an economy still recovering from the effects of a severe recession. US economic growth in the next two and a half years will be about half of the potential growth typical of an economic recovery period. As a result, the construction spending recovery will be delayed two additional quarters and will begin relatively slowly. Should another recession occur, it will quickly cause renewed declines in construction spending.

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

  Actual Forecast
  2008 2009 2010 2011 2012 2013
New Residential (% change 238.2 141.4 135.8 127.6 136.4 160.5
is year vs previous year) -34.2% -40.6% -4.0% -6.0% 6.8% 17.7%
Residential Improvements* 120.7 119.3 116.8 118.7 129.0 142.2
  -13.9% -1.1% -2.1% 1.6% 8.7% 10.2%
Non-residential Building 437.4 379.7 290.9 266.8 275.5 301.6
  8.6% -13.2% -23.4% -8.3% 3.3% 9.5%
Non-building 270.9 273.7 269.8 261.3 270.8 289.9
   (heavy engineering) 9.3% 1.0% -1.4% -3.1% 3.6% 7.0%
Total 1067.2 914.2 813.3 774.5 811.7 894.2
  -7.4% -14.3% -11.0% -4.8% 4.8% 10.2%

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

by Jim Haughey

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