Construction Spending Stumbles in July

09/25/2012 by Bernard M. Markstein

Total Construction Spending and its Major Components
The U.S. Census Bureau reported that total construction spending fell 0.9% in July to $834.4 billion at a seasonally adjusted annual rate (SAAR) after rising 0.4% in June, ending three months of consecutive increases. Nonetheless, year-to-date, not seasonally adjusted (NSA) construction spending was up 9.3% from the same period last year.

Nonresidential building construction slid 0.7% to $298.8 billion (SAAR) after declining 0.1% in June (revised down from a 0.3% increase, due to a $1.3 billion reduction in estimated spending). On a year-to-date basis, NSA spending was up 8.4% from the same period a year ago.

Heavy engineering (non-building) construction spending decreased 0.6% to $264.3 billion (SAAR), following a 1.1% drop in June (revised down from a 0.2% decline, due to a $2.0 billion reduction in estimated spending). On a year-to-date basis, spending was still up 10.7% NSA from the same period in 2011.

Total residential construction spending, which includes improvements, tumbled 1.6% to $271.2 billion (SAAR) after jumping 2.4% in June. On the other hand, new residential construction spending, which excludes improvements, rose 1.5% after leaping 3.3% in June. Thus, it was improvements spending, which fell 5.4%, that was a drag on total residential construction spending for the month. Nonetheless, total residential construction spending was up 8.9% year-to-date compared to the same period a year earlier, while new residential construction was up 13.9%.

Total public construction spending fell 0.4% in July after no change in June. On a year-to-date basis, public spending was down 2.1% from a year ago. The outlook is for public spending to continue to decline as federal, state, and local governments reduce public spending. Total private construction spending dropped 1.2%, its first decline in five months. On a year-to-date basis, private construction spending was up 15.8% over the same period last year.

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

  Current Monthly 3-Month Moving Average Year-to-Date (NSA)
  May-12 Jun-12 Jul-12 May-12 Jun-12 Jul-12 Jan-10 to
Jul-11
Jan-11 to
Jul-12
New Single-family 121.8 125.6 127.5 119.7 122.3 125.0 59.7 67.8
  Month-over-Month % Change 1.9% 3.1% 1.5% 1.1% 2.2% 2.1%    
  Year-over-year % Change (NSA) 14.7% 18.4% 19.4%       -8.6% 13.5%
New Multifamily (1) 26.3 27.4 27.9 25.3 26.4 27.2 12.8 14.8
  3.3% 4.0% 2.0% 3.0% 4.4% 3.1%    
  20.5% 19.2% 25.3%       -8.2% 15.8%
New Residential (2) 148.1 153.0 155.4 145.0 148.7 152.2 72.5 82.6
  2.1% 3.3% 1.5% 1.4% 2.6% 2.3%    
  15.7% 18.6% 20.4%       -8.5% 13.9%
Residential Improvements (3) 120.8 122.5 115.9 116.9 119.6 119.7 63.7 65.7
  4.5% 1.4% -5.4% 0.9% 2.3% 0.1%    
  -5.2% 6.5% 12.9%       0.9% 3.2%
Total Residential (4) (5) 268.9 275.5 271.2 261.9 268.4 271.9 136.2 148.3
  3.2% 2.4% -1.6% 1.2% 2.5% 1.3%    
  5.0% 12.7% 17.1%       -4.3% 8.9%
Nonresidential Building 301.1 300.9 298.8 298.4 299.7 300.3 156.9 170.0
  1.4% -0.1% -0.7% 0.7% 0.4% 0.2%    
  8.5% 3.4% 4.2%       -7.8% 8.4%
Heavy Engineering (Non-Building) 268.8 265.8 264.3 266.9 267.4 266.3 132.0 146.1
  0.5% -1.1% -0.6% 0.3% 0.2% -0.4%    
  13.3% 5.7% 8.5%       -5.5% 10.7%
Total (1) 838.8 842.2 834.4 827.3 835.4 838.5 425.0 464.4
  1.7% 0.4% -0.9% 0.7% 1.0% 0.4%    
  8.8% 7.1% 9.6%       -6.0% 9.3%

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 grow, albeit at a slower than desirable rate. August nonfarm payroll employment rose a disappointing 96,000 (SA) after a 141,000 increase in July (originally reported as a 163,000 increase). July marked the only time in the previous five months that employment gains have exceeded 100,000. Over those five months, the increase in employment has averaged only 87,000 per month.

However, one bright spot is the housing market, which appears to be gaining some momentum. Our forecast is that housing will continue to contribute to the economy for the remainder of this year and throughout next year and beyond. Improvement in residential construction helps lift the rest of the economy and is both a direct and indirect positive for nonresidential construction.

Risks to the Economy and the Forecast
There are risks to this modest forecast that could result in the U.S. falling into recession with a negative impact on commercial construction. Europe remains the biggest risk to the U.S. economy despite the recent announcement by the European Central Bank (ECB) of its willingness to purchase short-term government debt of troubled member countries. This is certainly a major move in the right direction. Nevertheless, other European political leaders have yet to step forward with credible long-term programs to address their problems. Short-term stop gap measures remain the order of the day for policymakers. Should Europe fall into a deep recession, U.S. economic growth would be adversely affected. However, a European debt default represents the greatest risk to the United States economy due to the fallout for U.S. and world financial markets.

Washington’s failure to address numerous serious issues is adding unnecessary uncertainty for businesses and creating a major risk for the economy. As a result businesses are limiting their hiring and investment plans. Two matters that need to be tackled immediately, although any resolution will likely be delayed until the last possible instant, are:

Failure to deal with either matter in a reasonably timely manner could push the U.S. into recession.

Higher energy prices are a constant risk to the U.S. and world economies. Recently, oil prices have moved up after falling in May and June. However, it would take a large and persistent increase in oil prices ($150 a barrel or higher) to send the U.S. into recession. Higher oil prices are not the sole risk from energy as the August refinery fires in the San Francisco area and a fire at a major Venezuelan refinery demonstrated. The disruption of refinery production and the resulting tightening of supply sent gasoline prices higher. Higher energy prices are a drain on the consumer pocketbook and, consequently, a drag on economic growth.

Our forecast assumes that these pitfalls are avoided.

The Forecast
This month we extend the forecast horizon out to 2014. The Reed Construction Data forecast, which assumes no recession, is for total construction spending to increase 8.1% in 2012, 7.9% in 2013, and 9.6% in 2014.

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

  Actual Forecast
  2009 2010 2011 2012 2013 2014
New Single-family 105.3 112.6 108.2 125.5 145.2 167.6
   Year-over-year % Change -43.3% 6.9% -3.9% 16.0% 15.7% 15.4%
New Multifamily (1) 35.9 24.1 22.6 27.3 33.7 38.4
-30.0% -32.9% -6.0% 20.8% 23.2% 14.1%
New Residential (2) 141.2 136.7 130.8 152.8 178.9 206.1
  -40.4% -3.2% -4.3% 16.8% 17.1% 15.2%
Residential Improvements (3) 112.7 112.5 114.9 119.3 124.2 132.8
-6.6% -0.2% 2.2% 3.8% 4.1% 7.0%
Total Residential (4) (5) 253.9 249.1 245.7 272.1 303.1 338.9
-29.0% -1.9% -1.4% 10.7% 11.4% 11.8%
Nonresidential Building 375.7 290.4 283.1 300.8 321.8 354.6
-14.2% -22.7% -2.5% 6.2% 7.0% 10.2%
Heavy Engineering (Non-Builidng) 273.5 265.0 249.4 268.2 282.3 301.0
  0.5% -3.1% -5.9% 7.5% 5.3% 6.6%
Total (5) 903.2 804.6 778.2 841.0 907.1 994.4
-15.4% -10.9% -3.3% 8.1% 7.9% 9.6%

(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 Falls in July
Heavy Engineering Construction Down Once More in July
New Residential Construction Spending Rises Again in July