Expect an end within a few months of the long decline in construction spending, already a 10.7% drop over twenty-eight months and at least double that after inflation adjustment. July construction spending fell 0.6% after June spending was revised sharply higher. The nominal value of construction spending reported monthly by the Census Bureau is essentially unchanged over the last eight months.

The mix of growth or decline in different sectors will change as the construction recession ends. Commercial construction spending rose 40% over 2006-07 but has stalled in the last six months rising only 4.4%, approximately matching project cost increases. Commercial projects are less attractive to investors than they were a year ago. Recent declines in the value of starts reported by Reed Construction Data suggest that the stall will become a marginal decline through the end of next year. Then modest growth resumes because the expansion phase of the commercial building cycle is not finished; it will resume when domestic economic growth is stronger and prospective development profits improve.

Spending for institutional building construction has also stalled recently but for a different reason. Spending is up 4% in the last six months after a 24% rise in 2006-07. Institutional facility managers are now being hit with both soaring project costs and a shrinking supply of new construction funds from the declining purchasing power of tax receipts and weakened investment earnings. The cost restraint will disappear quickly but the available funds restraint will worsen and persist through most of next year. As a result, institutional construction spending will expand very marginally after inflation adjustment over the next year and resume expanding later and more slowly than spending for commercial buildings.

Heavy construction spending is 4.7% higher than in January after a 44% rise in 2006-07. But relatively more steel, less lumber and no wallboard in non building projects mean that volume has been declining after adjusting for project cost increases. Highway spending is unchanged over the last two years while the materials cost index for highway construction rose 19%. More decline is expected until congress and state legislatures find supplemental general fund tax money to add to the shrinking purchasing power of highway trust funds that relay on a fixed tax per gallon of fuel. This does not now appear likely in 2008. Power construction spending has approximately doubled in the last three years driven mostly by oil & gas exploration, production and distribution. This will continue to expand, although at a slower pace, whether GDP rises or falls.

The volume of public funded project spending will shrink through the end of next year under pressure from bids exceeding budgets and the declining buying power of public budget reserves. But spending volume will increase slightly for privately funded projects. This includes water and sewer lines that respond to a pickup in site development that quickly follows renewed growth in residential construction as well as oil & gas projects spurred by the doubling of fuel prices from several years ago.

Residential construction spending declined 11.3% in the last six months after plunging 36% in 2006-07. The 2008 decline is not the consequence of declining housing starts. Starts have varied in a narrow range about a 1.0 million annual pace of starts since last December. Homebuilders have slowed completion of homes under construction by more than 25%. Starts of homes for sales are substantially below new home sales. Homebuilders are poised to quickly increase starts when sales resume rising. Reed Construction Data expects that turnabout later this year following the recent rise in consumer confidence prompted by the $40/bbl. drop in crude oil prices.

The anticipated increase in construction spending will be housing driven. Expect a nominal gain late this year and a real gain, after project cost increases by next winter. Within a year expect to pay higher prices for construction materials, such as lumber and plywood, largely used in homebuilding.

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