Construction Spending Stumbles at the Beginning of 2013

03/27/2013 by Bernard M. Markstein

Total Construction Spending and its Major Components
The U.S. Census Bureau reported that total construction spending fell 2.1% in January to $883.3 billion at a seasonally adjusted annual rate (SAAR), ending nine consecutive months of increasing spending and after rising 1.1% in December. On the positive side, spending numbers for November and December were revised up $15.5 billion and $17.6 billion, respectively. This was up 1.8% and 2.0%, respectively, from the previously reported numbers. On a year-over-year, not seasonally adjusted (NSA) basis, January construction spending increased 7.6%.

Nonresidential building construction dropped 1.6% to $297.3 billion (SAAR) in January following a 1.4% gain in December, which included $1.2 billion upward revision from the previously reported spending number. January spending was up 1.5% (NSA) from January 2012.

Heavy engineering (non-building) construction spending plunged 4.9% to $274.8 billion (SAAR). This followed a large revision in the November and December construction spending numbers — up $17.7 billion and $19.7 billion, respectively — 6.5% and 7.3% of their respective previously reported numbers. December’s revision was sufficient to change a 0.5% decrease into a 0.3% increase. On a year-over-year, NSA basis, spending was up 1.0% from January 2012.

Total residential construction spending, which includes improvements, was essentially unchanged from December, slipping $0.1 billion to $311.2 billion (SAAR). New residential construction spending, which excludes improvements, was up a strong 3.2% after increasing 1.4% in December. On a year-over-year, NSA basis, January total residential construction spending was up 22.2% and new residential construction was up 31.7%.

Total public construction spending fell for the second month in a row, down a seasonally adjusted (SA) 1.0% in January after also falling 1.0% in December. On a year-over-year, NSA basis from January 2012, public construction spending was down 3.9%. Total private construction spending was also down in January (-2.6%), ending ten consecutive monthly increases and following a 2.1% rise in December. On a year-over-year basis, January private construction spending was up 12.9%.

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

  Current Monthly 3-Month Moving Average
  Nov-12 Dec-12 Jan-13 Nov-12 Dec-12 Jan-13
New Single-family 144.5 145.3 150.5 140.8 143.8 146.7
  Month-over-Month % Change 2.1% 0.6% 3.6% 3.1% 2.1% 2.1%
  Year-over-year % Change (NSA) 30.7% 28.8% 30.5%      
New Multifamily (1) 30.4 32.1 32.5 29.5 30.7 31.6
  2.8% 5.4% 1.2% 2.7% 4.1% 3.1%
  31.1% 36.7% 37.4%      
New Residential (2) 174.9 177.3 183.0 170.3 174.4 178.4
  2.2% 1.4% 3.2% 3.1% 2.5% 2.3%
  30.8% 30.3% 31.7%      
Residential Improvements (3) 131.3 134.0 128.2 132.8 133.5 131.2
  -2.8% 2.0% -4.3% 0.6% 0.5% -1.7%
  9.2% 12.8% 9.7%      
Total Residential (4) (5) 306.2 311.3 311.2 303.1 307.9 309.6
  0.0% 1.7% 0.0% 2.0% 1.6% 0.5%
  20.9% 22.3% 22.2%      
Nonresidential Building 297.9 302.2 297.3 299.3 300.8 299.2
  -1.4% 1.4% -1.6% -0.5% 0.5% -0.5%
  2.2% 1.0% 1.5%      
Heavy Engineering (Non-Building) 288.3 289.1 274.8 274.5 281.7 284.1
  7.7% 0.3% -4.9% 2.9% 2.6% 0.8%
  14.2% 15.4% 1.0%      
Total (1) 892.4 902.6 883.3 877.0 890.4 892.8
  1.9% 1.1% -2.1% 1.4% 1.5% 0.3%
  12.1% 12.1% 7.6%      

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
Recent economic data indicate an economy bouncing back from fourth quarter’s slowdown despite continued wrangling in Washington over fiscal issues, including the sequestration (an across-the-board reduction in spending for most areas of federal government) that began March 1. As of this writing, Congress passed a continuing resolution to fund the federal government through the end of the fiscal year and the president is expected to sign it into law.

The next major hurdle is expiration of the higher, temporary federal debt ceiling in mid-May. Allowing the expiration to occur would force the Treasury to delay paying various federal obligations, such as Social Security and Medicare, federal payrolls, payments to contractors, tax refunds, and debt payments (a technical default of U.S. government debt). The result would be a shutdown of many government operations and, if allowed to persist, a significant increase in the risk of recession.

Meanwhile, most businesses appear to have grown weary of the constant wrangling in our nation’s capital and turned most of their attention to rising demand for their own output. Companies seem to have found comfort in the belief that the politicians will prevent the worst outcomes from occurring even if they fail to produce real solutions to these self-created problems. With the greater concentration on their own opportunities, many companies are increasing hiring. We believe they will also feel greater pressure to expand capacity — a positive for nonresidential construction.

Beyond Washington, there are other risks facing the economy. As the recent turmoil over a proposed bailout for Cypress showed, European economic issues have not disappeared. Among the major threats from Europe are possible sovereign debt default by one or more European countries and one or more countries abandoning the euro or total dissolution of the euro. Beyond Europe, there is the ever present risk of a significant, extended hike in energy prices.

Nonetheless, there are positives for the economy. These include low interest rates (the Federal Reserve’s Federal Open Market Committee recently reaffirmed actions that would keep rates low in the near term) and the continued improvement of the housing market. As a result, our forecast is based on the economy growing at a moderate rate.

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

If any one of these risks comes to pass, economic growth would be reduced (the drag from sequestration is already occurring and will increase if nothing is done to end it) and the probability of recession would increase. Also, commercial construction spending would be lower than the current forecast.

The Forecast
The Reed Construction Data forecast assumes that the outlined risks do not occur. Total construction spending is forecasted to grow 8.4% this year and 9.5% in 2014.

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

  Actual Forecast
  2009 2010 2011 2012 2013 2014
New Single-family 105.3 112.6 108.2 129.2 163.2 190.6
   Year-over-year % Change -43.3% 6.9% -3.9% 19.4% 26.3% 16.8%
New Multifamily (1) 35.9 24.1 22.6 27.3 34.7 39.6
-30.0% -32.9% -6.0% 20.5% 27.2% 14.1%
New Residential (2) 141.2 136.7 130.8 156.5 197.8 230.1
  -40.4% -3.2% -4.3% 19.6% 26.4% 16.3%
Residential Improvements (3) 112.7 112.5 114.9 126.3 135.3 146.5
-6.6% -0.2% 2.2% 9.9% 7.1% 8.3%
Total Residential (4) (5) 253.9 249.1 245.7 282.8 333.1 376.6
-29.0% -1.9% -1.4% 15.1% 17.8% 13.1%
Nonresidential Building 375.7 290.4 283.1 299.3 307.7 333.6
-14.2% -22.7% -2.5% 5.7% 2.8% 8.4%
Heavy Engineering (Non-Building) 273.5 265.0 249.4 273.3 286.4 305.5
  0.5% -3.1% -5.9% 9.6% 4.8% 6.7%
Total (5) 903.2 804.6 778.2 855.4 927.3 1,015.7
-15.4% -10.9% -3.3% 9.9% 8.4% 9.5%

(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 Drops in January
Heavy Engineering Construction Craters in January
New Residential Construction Spending Chugs Higher in January