The construction spending forecast for 2009-10 weakened slightly again since the last update a month ago. The 12.7% decline is now expected this year, deeper than the 11.3% drop expected a month ago. But next years’ decline is now projected at 3.0% instead of 3.7%, offsetting half of the large decline in 2009. This years’ bigger decline is due mostly to a 1.9% downward revision in the February spending total. A weaker outlook for the private commercial for the rest of 2009 also contributes.

The February revision was unusually large. It is certainty not the last word on February construction activity. Since winter months often have large revisions due to re-estimating seasonal adjustment factors. Also, early 2009 is an estimating challenge for the Census Bureau because of the turmoil in the market, especially the unusually large number of projects where work was slowed or halted after construction was started.

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.

Commercial building outlook sours; heavy outlook unchanged
Combined, the construction spending total for hotel, office and commercial (retail) was marked down 3.7% ($6.8B) from the initial February estimate. Much, perhaps most, of this was due to work slowing and stoppage by private developers. Some had problems rolling over short-term construction financing. Some had cash flow problems with falling rental income on their occupied properties. Some got nervous about their ability find tenants or get a high enough rental rate to make the project profitable. Some slowed or stopped work to pressure construction unions to give them major wage rate reductions. A number of New York City developers who have stopped projects in progress have reportedly asked their unions for a 25% wage reduction.

Nonresidential building construction spending will drop 6% this year after double digit gains for three years. Spending will improves throughout 2010 but the full year will average 0.5% below 2009. This years’ decline will be about 16% for private “for lease” buildings but only about 3% for institutional building whose owners are largely insulated from direct damage from the financial market and will get a small boost from economic stimulus spending.

Heavy construction spending will be down 6.6% this year after three years of double digit gains but will recover 4.7% in 2010 when the full impact of economic stimulus spending hits the market. The outlook for private heavy projects in transportation, utility and communications facilities is much weaker than the outlook for spending on public non-building projects. This reverses the trend in the last few years.

U.S. Non-building (Heavy Engineering) Construction
(billions of U.S. current dollars)

* Monthly figures are seasonally adjusted at annual rates (SAAR figures).
The total includes some miscellaneous buildings.
Actuals: U.S. Census Bureau, Department of Commerce (put-in-place investment figures).
Forecasts and table: Reed Research Group.

U.S. Nonresidential Construction
(billions of U.S. current dollars)

* Monthly figures are seasonally adjusted at annual rates (SAAR figures).
Actuals: U.S. Census Bureau (Department of Commerce) (put-in-place investment figures).
Forecasts and table: Reed Construction Data.

Housing spending plunges; likely near the bottom for this cycle
Construction spending for single family construction plunged 11% in February while the balance of the residential market — multi family and remodeling — increased slightly. Since the February drop was nearly as large last year, this may be a seasonal adjustment problem.

Residential construction spending is forecast to fall 25% in 2009 and recover 7% next year. Within a year, residential will be the fastest expanding construction sector and will hold this rank for several years. Reports on the current market situation continue to be grim. Homebuilders are progressively losing the financial capacity to hold or built spec inventory or prepare new sites for development. Increasingly, more prospective homebuyers are unable to get credit or are too concerned about their personal finances to make a major financial commitment.

But forward looking marker reports have turned much brighter. Permits, starts, sales and pending home sales all rose in the last reports. The Home Affordability Index is now at an astonishingly high 173.5. This is far above the level when housing starts were four times the current pace.

However the buying equation has two terms: affordability and confidence. The Conference Board’s Consumer Confidence Index inched up in March from 125.3 to 126.0. This may be the starts of a slow but progressive recovery in willingness to buy. At worst it probably signals that the steep plunge in buyer confidence is over.

U.S. Residential Building Construction
(thousands of units)

(1) Monthly figures are seasonally adjusted at annual rates (SAAR figures).
(2) Based on a survey of homebuilders; excludes homes built under contract and multi-family rental units.
(3) Manufactured home data is for November and December.
Forecasts and table: Reed Construction Data.