Construction Spending Disappoints in October

  • Construction spending was unchanged in October. This was not a good report, though.
  • Excluding improvements - a category that is badly estimated - spending fell 1.1%.
  • Private construction rose 0.3%; public construction slipped 0.4%.
  • Single-family home construction increased 1.9% - weakest gain in five months.
  • Multi-family housing construction fell 2.1% - smallest loss in seven months.
  • Private nonresidential construction dropped 2.5%. The downturn in this sector is intensifying.
  • Downward data revisions will result in a 0.2% downward revision to third quarter GDP growth.

Construction Outlook
We suggest excluding residential improvements in evaluating this report, because improvements are badly estimated (for that reason, they are not itemized). Excluding residential improvements, which jumped 8.7%, construction spending fell 1.1% in October. In short, this was not a good report.

This report sheds further light on four ongoing trends. A key one is the turnaround in single-family home construction, which in June increased for the first time in 40 months, and has made solid gains since. October's gain of 1.9% was much smaller than the gains posted during the previous four months. The estimate for this category is based on a weighted average of single-family housing starts, which have been improving steadily since January-but the gains have slowed recently-indeed, single-family housing starts fell in October.

Single-family starts have slowed probably because the tax credit for first-time homebuyers shifted the timing of housing starts from the second half of 2009 into the first half. Going forward, single-family starts should continue to improve because inventories of new homes have fallen to their lowest level since 1972, and will require restocking and because the household formation rate will increase as the economy starts adding jobs in 2010.

The second development is the collapse in the market for multi-family homes (i.e., the rental market). This market is being hit on two fronts. Tight credit and overbuilding are hammering multi-family housing construction, which has nearly ground to a halt. The rental market is also being hurt by falling house prices and the tax credit for first-time homebuyers, which is swaying renters into becoming homeowners. The outlook for this category over the next 12 months is grim.

The third development is the worsening downturn in private nonresidential construction. Most categories are dropping at double-digit year-on-year rates, and we are not even at the halfway point in this sector's downturn. Until recently, spending on two categories, power and manufacturing, had mitigated the drop in the top-line number. Spending on power continued to grow because of a surge in spending on oil and gas pipelines. A surge in refinery construction kept the manufacturing numbers up. However, the pipeline and refinery projects are winding down, and both categories are in the early stages of a downturn that promises to be steep. Outside these categories, spending this year is down across the board, with commercial (down 35.3%), lodging (down 36.5%), office (down 30.9%), and amusements (down 29.1%) posting the largest year-to-date declines.

The outlook for private nonresidential construction over the next year and a half is grim due to overbuilding, the collapse of the securitization market, tight credit, plunging real estate prices, rising vacancy rates, and rising unemployment.

Fourth and finally, public construction slipped in October, but is still up 5.3% since the start of the year. This category should continue to post respectable advances over the next year because of increased spending on infrastructure.

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