Construction Spending Ends the First Quarter on a Sour Note

05/28/2013 by Bernard M. Markstein

Total Construction Spending and its Major Components
The U.S. Census Bureau reported that total construction spending fell 1.7% in March to $856.7 billion at a seasonally adjusted annual rate (SAAR) following a 1.5% increase in February. For the first quarter, spending was down 2.9% from the fourth quarter after seven consecutive quarterly increases. On the positive side, year-to-date not seasonally adjusted (NSA) construction spending was up 4.7% compared to the same period in 2012.

Nonresidential building construction dropped 2.2% to $290.7 billion (SAAR) in March after increasing 1.3% in February. For the first quarter, spending was down 2.1% from the fourth quarter. Year-to-date spending was 0.8% (NSA) lower than in 2012.

Heavy engineering (non-building) construction spending plunged 3.7% to $264.4 billion (SAAR) in March after rising 1.0% in February. For the first quarter, spending was down 4.3% from the fourth quarter. Excluding power construction spending, which had unusual movements between the fourth and first quarters due to tax incentives, heavy engineering spending decreased 2.9%. Year-to-date heavy engineering NSA spending was unchanged from the same period in 2012.

Total residential construction spending, which includes improvements, rose 0.7% in March to $301.6 billion (SAAR) after advancing 2.2% in February. New residential construction spending, which excludes improvements, increased 1.7% after spurting 4.0% higher in February. For the first quarter, total residential spending fell 2.3%, but new residential construction was up 9.7% from the fourth quarter. Year-to-date NSA total residential construction spending was 16.4% higher and new residential construction was 36.1% higher than the same period in 2012.

These construction spending numbers are discouraging. Giving them a positive spin, they may represent a stumble for construction that will prove temporary. They are more worrisome if the numbers prove to be the beginning of a retrenchment in construction activity. Two factors should be kept in mind that provide some hope. First, the spending numbers are subject to revision (although this includes being revised down as well as up).

Second, even though these are seasonally adjusted numbers, the adverse weather in much of the country in March may have slowed construction activity. Given the relative mild winters of the past few years, the seasonal adjustment process may have amplified a weather related downturn. This could adversely affect the April numbers (due out in early June) as well. We may have to wait until the May numbers are available to determine to properly determine the health of construction.

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

  Current Monthly (1)
(latest actual values)
3-Month Moving Average Year-to-Date (NSA)
  Jan-13 Feb-13 Mar-13 Jan-13 Feb-13 Mar-13 Jan-12 to
Mar-12
Jan-13 to
Mar-13
New Single-family 151.3 159.4 162.0 147.4 152.4 157.6 24.5 33.2
  Month-over-Month % Change 3.4% 5.4% 1.6% 2.3% 3.4% 3.4%    
  Year-over-year % Change (NSA) 31.2% 36.1% 38.5% 30.5% 32.2% 35.4% 9.0% 35.4%
New Multifamily (2) 33.5 32.8 33.6 31.9 32.7 33.3 5.6 7.8
  5.2% -2.1% 2.5% 4.2% 2.5% 1.8%    
  42.0% 36.1% 40.5% 42.0% 39.0% 39.5% 9.3% 39.5%
New Residential (3) 184.8 192.2 195.6 179.3 185.0 190.8 30.1 41.0
  3.7% 4.0% 1.7% 2.6% 3.2% 3.1%    
  33.2% 36.1% 38.8% 31.4% 33.2% 36.1% 9.1% 36.1%
Residential Improvements (4) 108.6 107.5 106.1 121.8 113.8 107.4 22.3 20.0
  -13.4% -1.0% -1.3% -6.8% -6.5% -5.7%    
  -11.3% -11.1% -8.5% 1.5% -5.7% -10.3% 3.5% -10.3%
Total Residential (5) (6) 293.3 299.7 301.6 301.0 298.9 298.2 52.4 60.9
  -3.4% 2.2% 0.7% -1.4% -0.7% -0.2%    
  13.9% 15.9% 19.1% 18.0% 16.1% 16.4% 6.7% 16.4%
Nonresidential Building 293.2 297.1 290.7 296.9 296.6 293.6 66.7 66.1
  -2.1% 1.3% -2.2% -1.0% -0.1% -1.0%    
  0.2% 0.3% -2.7% 0.9% 0.2% -0.8% 11.7% -0.8%
Heavy Engineering (Non-Building) 271.6 274.5 264.4 283.5 278.9 270.2 54.6 54.6
  -6.5% 1.0% -3.7% 0.5% -1.6% -3.1%    
  0.8% 1.6% -2.2% 10.8% 6.5% 0.0% 12.5% 0.0%
Total (6) 858.1 871.2 856.7 881.4 874.3 862.0 173.6 181.7
  -4.0% 1.5% -1.7% -0.7% -0.8% -1.4%    
  4.5% 5.3% 4.2% 9.3% 7.0% 4.7% 10.4% 4.7%

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

Total public construction spending plummeted a seasonally adjusted (SA) 4.1% in March after increasing 1.5% in February. Year-to-date NSA public construction spending was down 5.3% from the same period in 2012.

Total private construction spending decreased 0.6% in March after rising 1.5% in February. Year-to-date NSA private construction spending was up 9.3% from 2012.

Public and Private Construction Spending
(billions of U.S. current dollars)

  Current Monthly (1)
(latest actual values)
3-Month Moving Average Year-to-Date (NSA) Annual
  Jan-13 Feb-13 Mar-13 Jan-13 Feb-13 Mar-13 Jan-12 to
Mar-12
Jan-13 to
Mar-13
2010 2011 2012
Public Spending 265.3 269.2 258.3 269.5 267.8 264.3 55.0 52.1 304.0 283.3 275.7
  Month-over-Month % Change -1.4% 1.5% -4.1% -1.1% -0.6% -1.3%          
  Year-over-year % Change (NSA) -4.4% -4.1% -7.3% -4.7% -5.1% -5.3% -3.6% -5.3% -3.5% -3.5% -3.5%
Private Spending 592.9 602.0 598.4 611.9 606.5 597.8 118.6 129.6 500.6 495.0 578.8
  -5.1% 1.5% -0.6% -0.5% -0.9% -1.4%          
  8.7% 9.8% 9.5% 16.3% 12.7% 9.3% 18.3% 9.3% -14.9% -14.9% -14.9%

Monthly levels are seasonally adjusted at annual rates (SAAR figures).
Source: Census Bureau, U.S. Department of Commerce.

The Economy
After a disappointing March employment report, April’s numbers were heartening. Nonfarm SA payroll employment rose by 165,000 jobs in April and the increase in the number of jobs for March was revised up from 88,000 to 138,000. Further, February’s previously reported increase of 268,000 jobs was revised up to 332,000. For the first four months of the year, employment gains averaged 196,000 per month, up a bit from the 191,000 per month average for the last four months of 2012. Clearly, faster employment growth at this juncture would be desirable, but the approximately 200,000 per month gain indicates an economy advancing at a moderate pace.

Following ten consecutive months of increases, construction employment fell by 6,000 jobs, possibly a victim of the bad weather and the seasonal adjustment process previously noted. The decrease was concentrated in nonresidential construction employment, which lost over 19,000 jobs, offsetting gains in residential construction employment. However, on a year-over-year NSA basis, construction employment was up 158,000 jobs. Meanwhile, the NSA construction unemployment rate for April was 13.2%, down from 14.5% in April 2012.

The U.S. economy continues to grow in the face of several impediments and risks. Fiscal drag from reduced government spending and the end of the two year Social Security tax holiday is the major obstacle to faster growth that is clearly under the nation’s control. This includes sequestration (the across the board cuts to much of federal spending) whose negative effects are becoming evident and are growing and spreading. Another impediment (over which we have no control) is recession in much of Europe, which is a drag on our exports to that part of the world.

Major risks to the economy include likely battles over providing funding for federal government operations beyond September 2013 when current authorization for spending ends and over raising the federal debt ceiling, which will become an issue in the fall.

There are some positive forces offsetting these impediments and risks, propelling the economy forward. These include historically low interest rates and an improving housing market.

The Reed forecast is based on the economy growing at a moderate, if unspectacular, pace.

Risks to the Economy and the Forecast
Major risks to the economy include:

If any one of these events occurs, economic growth will be reduced and the probability of recession will be increased. The result will also be lower commercial construction spending than currently forecast by Reed.

The Forecast
The Reed forecast assumes that the above risks are avoided. Total construction spending is forecast to grow 4.0% this year, largely due to new residential construction, and 9.7% in 2014.

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

  Actual Forecast
  2009 2010 2011 2012 2013 2014
New Single-family 105.3 112.6 108.2 129.3 168.3 195.8
   Year-over-year % Change -43.3% 6.9% -3.9% 19.5% 30.2% 16.3%
New Multifamily (1) 35.9 24.1 22.6 27.2 35.2 40.2
-30.0% -32.9% -6.0% 20.4% 29.3% 14.1%
New Residential (2) 141.2 136.7 130.8 156.5 203.6 236.0
  -40.4% -3.2% -4.3% 19.6% 30.1% 15.9%
Residential Improvements (3) 112.7 112.5 114.9 125.6 110.2 121.4
-6.6% -0.2% 2.2% 9.3% -12.2% 10.1%
Total Residential (4) (5) 253.9 249.1 245.7 282.8 313.8 357.4
-29.0% -1.9% -1.4% 15.1% 11.0% 13.9%
Nonresidential Building 375.7 290.4 283.1 299.3 300.0 324.7
-14.2% -22.7% -2.5% 5.7% 0.2% 8.3%
Heavy Engineering (Non-Building) 273.5 265.0 249.4 273.3 276.2 294.1
  0.5% -3.1% -5.9% 9.6% 1.0% 6.5%
Total (5) 903.2 804.6 778.2 855.4 889.9 976.3
-15.4% -10.9% -3.3% 9.9% 4.0% 9.7%

(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.

Read more forecasts from Reed Construction Data:

Nonresidential Building Construction Spending Sinks in March
Heavy Engineering Construction Slumps in March
New Residential Construction Spending Grows at a Slower Pace in March