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Construction Spending Edges Up in September

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The U.S. Census Bureau reported that total construction spending rose 0.6% in September to $851.6 billion at a seasonally adjusted annual rate (SAAR) after slipping 0.1% in August. The Census Bureau also revised construction spending numbers for August up by $9.1 billion (1.1% higher than reported last month) and for July by $4.6 billion (0.5% higher than reported last month). Year-to-date not seasonally adjusted (NSA) construction spending was up 8.9% compared to the same period last year.

Total Construction Spending and its Major Components
The U.S. Census Bureau reported that total construction spending rose 0.6% in September to $851.6 billion at a seasonally adjusted annual rate (SAAR) after slipping 0.1% in August. The Census Bureau also revised construction spending numbers for August up by $9.1 billion (1.1% higher than reported last month) and for July by $4.6 billion (0.5% higher than reported last month). Year-to-date not seasonally adjusted (NSA) construction spending was up 8.9% compared to the same period last year.

Nonresidential building construction fell 1.4% to $294.4 billion (SAAR) in September following a 0.2% increase in August (previously reported as a 1.2% decrease, but revised up by $2.2 billion). On a year-to-date NSA basis, spending increased 6.4% from the same period in 2011.

Heavy engineering (non-building) construction spending rebounded 0.7% to $265.0 billion (SAAR) in September following a 1.6% drop in August. On a year-to-date NSA basis, spending was 8.6% higher than last year.

Total residential construction spending, which includes improvements, increased for the sixth consecutive month, rising 2.7% to $292.2 billion (SAAR) after advancing 1.2% in August. There was an upward revision of $4.6 billion for the August spending number. New residential construction spending, which excludes improvements, continued to show strong growth, increasing a robust 3.3% following a healthy 3.0% rise the previous month and also making it six consecutive months of increases. Year-to-date total residential construction spending was up 12.1% from the same period a year ago, and new residential construction was up 16.1% from 2011.

Total public construction spending declined 0.8% in September after decreasing 0.3% in August. On a year-to-date basis, public spending was down 2.7% from the same period in 2011. Public spending is expected to fall further. Total private construction spending jumped 1.3% in September after inching up 0.1% in August. September marked the seventh monthly increase in a row. On a year-to-date basis, private construction spending increased 15.7% compared to the same period a year ago.

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

  Current Monthly 3-Month Moving Average Year-to-Date (NSA)
  Jul-12 Aug-12 Sep-12 Jul-12 Aug-12 Sep-12 Jan-11 to
Sep-11
Jan-12 to
Sep-12
New Single-family 127.7 132.0 137.1 125.0 128.4 132.3 80.2 93.0
  Month-over-Month % Change 1.7% 3.4% 3.9% 2.2% 2.7% 3.0%    
  Year-over-year % Change (NSA) 18.6% 21.2% 25.8%       -6.5% 15.9%
New Multifamily (1) 27.7 28.1 28.3 27.2 27.7 28.0 16.9 19.8
  1.0% 1.3% 0.7% 2.8% 2.2% 1.0%    
  24.4% 18.7% 20.6%       -6.8% 16.7%
New Residential (2) 155.4 160.1 165.3 152.2 156.1 160.3 97.2 112.8
  1.6% 3.0% 3.3% 2.3% 2.6% 2.6%    
  19.6% 20.8% 25.0%       -6.5% 16.1%
Residential Improvements (3) 125.8 124.4 126.8 123.8 125.0 125.7 84.5 91.0
  0.8% -1.1% 2.0% 2.8% 1.0% 0.6%    
  27.0% 15.1% 12.5%       0.9% 7.6%
Total Residential (4) (5) 281.2 284.4 292.2 275.9 281.1 285.9 181.7 203.8
  1.2% 1.2% 2.7% 2.5% 1.9% 1.7%    
  22.9% 18.1% 19.4%       -3.2% 12.1%
Nonresidential Building 298.1 298.6 294.4 300.0 299.2 297.0 210.6 224.0
  -0.9% 0.2% -1.4% 0.1% -0.3% -0.7%    
  4.4% 1.8% -1.0%       -5.6% 6.4%
Heavy Engineering (Non-Building) 267.4 263.1 265.0 267.6 265.7 265.2 181.3 197.0
  0.3% -1.6% 0.7% 0.0% -0.7% -0.2%    
  9.1% 4.2% 1.7%       -5.6% 8.6%
Total (1) 846.6 846.2 851.6 843.5 846.0 848.1 573.7 624.8
  0.2% -0.1% 0.6% 0.9% 0.3% 0.3%    
  11.6% 7.6% 6.1%       -4.8% 8.9%

Monthly levels are seasonally adjusted at annual rates (SAAR figures).
(1) New Multifamily = New Private Multifamily + New Public Multifamily - Public Improvements (estimated by Reed Economics)
(2) New Residential = New Single-family + New Multifamily
(3) Residential Improvements include remodeling, renovation and replacement work.
Number also includes RCD estimate of improvements to public housing.
(4) Total Residential = New Single-family + New Multifamily + Residential Improvements.
(5) Total may not equal the sum of its components due to rounding.
Source: Census Bureau, U.S. Department of Commerce.

The Economy
The economy continues to move forward, though not as fast as most would hope. October nonfarm payroll employment rose 171,000 (SA) after increasing 148,000 in September (revised up from 114,000) and 192,000 in August (revised up from 142,000). The rise in employment has exceeded 100,000 for four consecutive months and has averaged an increase of 173,000 jobs per month over that period. That compares with an average increase of 146,000 jobs per month for the first half of the year. The unemployment rate for October rose slightly to 7.9% (SA) from 7.8% in September. The rise in the rate was due to workers entering (re-entering?) the workforce faster than new jobs were created. Meanwhile, the housing market is holding on to its gains and providing a boost to the economy.

Risks to the Economy and the Forecast
The risks to our forecast for the economy and for commercial construction have not changed substantially. They remain as follows:

  • A European debt default. Although Europe has not dominated the economic and financial news lately, the risk to the U.S. and world economies from a European debt default remains. However, the major European powers (that should probably be power, singular, i.e. Germany) are unlikely to let that happen given the threat to all the economies of Europe from one country’s debt default. A Greek debt default would prove most tolerable, but could not be allowed to go further. Even that may be too great a risk as it could quickly spread, threatening the debt of other weak countries such as Spain and Italy, and spinning out of control.
  • Dissolution of the euro. This is less of a threat to the U.S. or Europe, but would still hurt both economies. A total abandonment of the euro by Europe is unlikely. But one or more countries could abandon the euro, with Greece the most likely to do so.
  • The fiscal cliff — tax rates jumping on January 1 and drastic cuts to many federal programs, agencies, and departments. Immediately after the election, there was a short period of talk suggesting that some sort of compromise could be achieved. That lasted maybe a day. Since then, there has been lots of rhetoric, though not as heated as before the election. There does seem to be the possibility of a resolution since both sides would be risking a lot to not deal with the issue. Nonetheless, the risk of no immediate resolution and going over the fiscal cliff for several weeks to a month or two remains. At best, it looks like nothing will be done until near the end of December, disquieting the financial markets and adding unneeded uncertainty to business planning.
  • The debt ceiling. The federal debt continues to rise, pushing it towards the debt ceiling. Hitting the debt ceiling would be disruptive to federal government operations and cause turmoil in financial markets. On the positive side, there is talk of including a higher debt ceiling with legislation addressing the fiscal cliff. However, this is yet another chance for both political parties to play chicken with the threat of an unnecessary disruption of the functioning of the federal government and yet again injecting uncertainty into the business environment.
  • Higher energy prices. Oil prices have stabilized and moved lower recently. Nevertheless, the perennial threat of oil prices moving significantly higher (50% or more) and staying there for several months remains.

Many of these factors are already adversely affecting businesses, reducing their willingness to invest and slowing economic growth. Were one or more of the worst cases outlined to come to pass, then the U.S. economy would fall into recession. Reed Economics is reasonably confident that the worst case scenarios will not occur. However, the risk of recession from these events remains.

The Forecast
The Reed Construction Data forecast assumes that the outlined risks are avoided and the United States avoids recession. Total construction spending is projected to rise 8.3% in 2012, 7.7% in 2013, and 9.2% in 2014.

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

  Actual Forecast
  2009 2010 2011 2012 2013 2014
New Single-family 105.3 112.6 108.2 128.0 152.7 176.7
   Year-over-year % Change -43.3% 6.9% -3.9% 18.3% 19.4% 15.7%
New Multifamily (1) 35.9 24.1 22.6 27.0 32.7 37.3
-30.0% -32.9% -6.0% 19.2% 21.1% 14.1%
New Residential (2) 141.2 136.7 130.8 154.9 185.4 214.0
  -40.4% -3.2% -4.3% 18.4% 19.7% 15.4%
Residential Improvements (3) 112.7 112.5 114.9 122.7 132.4 142.9
-6.6% -0.2% 2.2% 6.8% 7.9% 8.0%
Total Residential (4) (5) 253.9 249.1 245.7 277.6 317.8 356.9
-29.0% -1.9% -1.4% 13.0% 14.5% 12.3%
Nonresidential Building 375.7 290.4 283.1 297.9 310.3 336.4
-14.2% -22.7% -2.5% 5.2% 4.2% 8.4%
Heavy Engineering (Non-Building) 273.5 265.0 249.4 267.3 279.8 298.4
  0.5% -3.1% -5.9% 7.2% 4.7% 6.7%
Total (5) 903.2 804.6 778.2 842.8 907.9 991.7
-15.4% -10.9% -3.3% 8.3% 7.7% 9.2%

(1) New Multifamily = New Private Multifamily + New Public Multifamily - Public Improvements
(estimated by Reed Economics)
(2) New Residential = New Single-family + New Multifamily
(3) Residential Improvements include remodeling, renovation and replacement work.
Number also includes RCD estimate of improvements to public housing.
(4) Total Residential = New Single-family + New Multifamily + Residential Improvements.
(5) Total may not equal the sum of its components due to rounding.
Source: Census Bureau, U.S. Department of Commerce. Forecast: Reed Construction Data.

by Bernie Markstein

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