Construction Spending Up for Third Consecutive Month

08/21/2012 by Bernard M. Markstein

Total Construction Spending and its Major Components
The U.S. Census Bureau reported that total construction spending increased 0.4% in June to $842.1 billion at a seasonally adjusted annual rate (SAAR) after rising 1.6% in May, and marks the third consecutive monthly increase. Year-to-date, not seasonally adjusted (NSA) construction spending was up 9.0% from the same period last year. April and May construction spending numbers were revised up a total of just under $11 billion.

Nonresidential building construction rose 0.3% to $302.1 billion (SAAR) after advancing 1.4% in May (revised up from a 0.1% decline). On a year-to-date basis, NSA spending was up 9.2% from the same period a year ago.

Heavy engineering (non-building) construction spending slipped 0.2% to $267.9 billion (SAAR), following a 0.4% increase in May. On a year-to-date basis, spending was up 11.0% NSA from the same period in 2011.

Total residential construction spending, which includes improvements, was up 1.3% to $272.1 billion (SAAR) after jumping 3.0% in May. New residential construction spending, which excludes improvements, increased a healthy 3.0% after rising an almost as strong 2.7% in May. Total residential construction spending was up 6.9% year-to-date compared to the same period a year earlier, while new residential construction was up 12.8%.

Total public construction spending held steady in June after increasing 0.5% in May (revised up from a 0.4% decrease). On a year-to-date basis, public spending was down 3.1% from a year ago. The outlook is for public spending to return to its downward path as local governments balance their budgets and as Washington limits public spending. Total private construction spending increased 0.7% following May’s 2.1% rise. On a year-to-date basis, private construction spending was up 15.9% 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)
  Apr-12 May-12 Jun-12 Apr-12 May-12 Jun-12 Jan-10 to
Jun-11
Jan-11 to
Jun-12
New Single-family 119.6 122.2 125.9 118.4 119.8 122.5 49.7 55.8
  Month-over-Month % Change 1.6% 2.2% 3.0% 1.1% 1.2% 2.3%    
  Year-over-year % Change (NSA) 11.7% 14.9% 18.3%       -9.0% 12.4%
New Multifamily (1) 25.5 26.8 27.5 24.5 25.4 26.6 10.8 12.4
  5.9% 5.1% 2.8% 2.3% 3.7% 4.5%    
  15.1% 23.3% 20.2%       -8.0% 14.8%
New Residential (2) 145.0 148.9 153.4 142.9 145.2 149.1 60.5 68.2
  2.3% 2.7% 3.0% 1.3% 1.6% 2.7%    
  12.3% 16.3% 18.6%       -8.8% 12.8%
Residential Improvements (3) 115.6 119.6 118.7 115.9 116.5 118.0 54.0 54.1
  1.1% 3.5% -0.8% -0.6% 0.5% 1.2%    
  -0.8% -6.0% 1.2%       2.1% 0.2%
Total Residential (4) (5) 260.6 268.5 272.1 258.8 261.8 267.1 114.5 122.3
  1.7% 3.0% 1.3% 0.5% 1.1% 2.0%    
  5.9% 4.9% 10.1%       -4.0% 6.9%
Nonresidential Building 297.0 301.3 302.1 296.4 298.5 300.2 131.2 143.2
  -0.1% 1.4% 0.3% 0.2% 0.7% 0.5%    
  9.9% 8.2% 3.6%       -9.1% 9.2%
Heavy Engineering (Non-Building) 267.5 268.5 267.9 266.0 266.8 267.9 109.5 121.5
  1.1% 0.4% -0.2% -0.6% 0.3% 0.4%    
  11.8% 12.4% 6.0%       -5.4% 11.0%
Total (1) 825.1 838.3 842.1 821.2 827.1 835.2 355.1 387.1
  0.9% 1.6% 0.4% 0.0% 0.7% 1.0%    
  9.1% 8.4% 6.5%       -6.4% 9.0%

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 suffered slower economic growth in the second quarter with real (inflation-adjusted) gross domestic product (GDP) advancing 1.5% at a seasonally adjusted annual rate (SAAR), down from first quarter’s 2.0% rate. This should prove to be a temporary slowdown. In the first indication that improved growth is in the offing, nonfarm payroll employment, which rose less than 100,000 on a seasonally adjusted (SA) basis each month of the second quarter, spurted up 163,000 in July — well more than double June’s 64,000 increase.

Another positive is the continued improvement in housing, which appears to be on more solid footing despite some monthly variation. Residential construction has ceased to be a drag on the economy and has added to growth (sometimes only modestly) each quarter since second quarter 2011. Housing should continue to be a net contributor to the economy going forward. Rising residential construction will feed through to the rest of the economy, helping several sectors, including nonresidential construction.

Risks to the Economy and the Forecast
Although the economy is likely to turn in steady, if not spectacular, growth, there are risks to the forecast that could tip the U.S. into recession and send commercial construction into a tailspin. Europe continues as the top risk to the U.S. economy due to European policymakers’ failure to provide any solid long-term solutions. The European Union and the euro are likely to survive, with the fate of Greece still in question. A deep European recession would be a drag on U.S. growth, but a default of European debt carries the greatest risk due to its impact on the U.S. and world financial markets.

Another major risk is Washington’s inability to address numerous looming issues in a timely and effective manner, creating unnecessary uncertainty for businesses. The result is increased reluctance by businesses to hire and to invest. Two issues should be dealt with as soon as possible, but will not likely be addressed until the last moment:

Failure to resolve either issue could precipitate a U.S. recession.

As always, the risk of higher energy prices is a threat to the U.S. and world economies. Oil prices have been back on an upward path over the past few weeks. We believe the recent increase in oil prices will prove temporary, but is troubling nonetheless. A prolonged, spike in oil prices ($150 a barrel or higher) would hurt consumers and adversely affect economic growth, possibly pushing the U.S. into recession. Higher oil prices are not the only threat from energy, as the recent refinery fires in the San Francisco area are proving. Gasoline prices are already moving higher due to the supply disruption.

Our forecast assumes that none of these worst case scenarios will come to pass, but the risk that one might remains.

The Forecast
Assuming no recession, the Reed Construction Data forecast is for total construction spending to increase 8.1% in 2012, and 7.4% in 2013.

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

  Actual Forecast
  2008 2009 2010 2011 2012 2013
New Single-family 185.8 105.3 112.6 108.2 124.0 141.9
   Year-over-year % Change -39.1% -43.3% 6.9% -3.9% 14.6% 14.4%
New Multifamily (1) 51.2 35.9 24.1 22.6 27.3 33.3
-8.1% -30.0% -32.9% -6.0% 20.7% 21.9%
New Residential (2) 237.0 141.2 136.7 130.8 151.3 175.1
  -34.3% -40.4% -3.2% -4.3% 15.7% 15.8%
Residential Improvements (3) 120.7 112.7 112.5 114.9 118.7 123.9
-13.5% -6.6% -0.2% 2.2% 3.3% 4.4%
Total Residential (4) (5) 357.7 253.9 249.1 245.7 270.0 299.1
-28.5% -29.0% -1.9% -1.4% 9.9% 10.8%
Nonresidential Building 437.7 375.7 290.4 283.1 301.2 323.5
8.4% -14.2% -22.7% -2.5% 6.4% 7.4%
Heavy Engineering (Non-Builidng) 272.1 273.5 265.0 249.4 270.0 281.3
  9.7% 0.5% -3.1% -5.9% 8.2% 4.2%
Total (5) 1,067.6 903.2 804.6 778.2 841.2 903.9
-7.4% -15.4% -10.9% -3.3% 8.1% 7.4%

(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 Rises for the Second Month in a Row
Heavy Engineering Construction Stumbles in June
New Residential Construction Spending Continues Upward