Construction spending declined 3.3% in January from a December total that was revised down by 3.2%. Spending dropped 8.9% since October and is projected to decline 6-7% more by the end of the year. Commercial buildings have replaced housing as the weakest sector although the pace of decline has recently picked up in the residential market. Heavy construction remains the most resistant to the recession. But its first significant month-to month decline (6%) occurred in January.

Most of the downward revision late last year was probably due to the stoppage or slowing of projects previously started. The Census Bureau’s process for estimating construction spending does not quickly catch this infrequent event well. Presumably late project reports revealed that projects assumed to be proceeding at a normal pace had been stopped or slowed due either to financing difficulties or a worsening or rental or sale prospects. An increasing number of sizable homebuilders whose reserves are exhausted have recently stopped operating. Some will hibernate until the market improves; others will never return.

The markdown of November and December activity spilled over into January and was supplemented by the previously reported plunge in January construction starts. Housing starts fell 17% and the value of nonresidential construction starts fell 23%, according to Reed Construction data. Several more steep monthly declines are expected before the new construction money recently approved in Washington can cushion the decline.

Overall construction spending is now expected to drop 12% in 2009 and then recover 4.6% in 2010. The peak spending level reached in March 2006 will not be regained until about mid-2012.

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

*Residential Improvements include remodeling, renovation and replacement work.
Actuals: U.S. Census Bureau, Department of Commerce.
Forecasts and table: Reed Construction Data.