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Construction Spending Slips Further in August

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Total construction spending fell 0.6% in August to $837.1 billion at a seasonally adjusted annual rate (SAAR) after moving 0.4% lower in July according to a report from the U.S. Census Bureau. Further, the construction spending numbers were revised up $2.8 billion for June and $7.6 billion for July. Thus, despite the two back-to-back monthly declines, it is no surprise that year-to-date not seasonally adjusted (NSA) construction spending was 9.0% higher than the same period in 2011.

Total Construction Spending and its Major Components
Total construction spending fell 0.6% in August to $837.1 billion at a seasonally adjusted annual rate (SAAR) after moving 0.4% lower in July according to a report from the U.S. Census Bureau. Further, the construction spending numbers were revised up $2.8 billion for June and $7.6 billion for July. Thus, despite the two back-to-back monthly declines, it is no surprise that year-to-date not seasonally adjusted (NSA) construction spending was 9.0% higher than the same period in 2011.

Nonresidential building construction was down 1.2% to $296.4 billion (SAAR) in August after decreasing 0.3% the previous month. July spending was revised up $1.1 billion, reducing the decrease from the originally reported 0.7% decline. On a year-to-date basis, NSA spending was up 7.3% from last year.

Heavy engineering (non-building) construction spending dropped 1.4% to $260.8 billion (SAAR), in August after falling 0.7% in July. On a year-to-date basis, spending rose 9.5% NSA from a year ago.

Total residential construction spending, which includes improvements, advanced 0.9% to $279.9 billion (SAAR) after slipping 0.1% in July. July’s spending number, which was originally reported as a 1.6% fall, was revised up $6.2 billion. New residential construction spending, which excludes improvements, shot up 2.9% after rising 1.6% in July. Year-to-date total residential construction spending was 10.5% higher than the same period in 2011, and new residential construction was 14.8% higher than in 2011.

Total public construction spending fell 0.8% in after declining 0.5% in July and was 2.1% lower on a year-to-date basis compared to 2011. Public spending is expected to continue on its downward trajectory. Total private construction spending decreased 0.5% in August after a 0.3% decrease in July. Year-to-date private construction spending rose 15.5% compared to last year.

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

  Current Monthly 3-Month Moving Average Year-to-Date (NSA)
  Jun-12 Jul-12 Aug-12 Jun-12 Jul-12 Aug-12 Jan-11 to
Aug-11
Jan-12 to
Aug-12
New Single-family 125.6 127.6 131.2 122.3 125.0 128.1 70.0 80.1
  Month-over-Month % Change 3.1% 1.6% 2.8% 2.2% 2.2% 2.5%    
  Year-over-year % Change (NSA) 18.0% 18.9% 20.8%       -7.6% 14.5%
New Multifamily (1) 27.4 27.9 28.8 26.4 27.2 28.1 14.9 17.4
  4.3% 1.8% 3.2% 4.5% 3.1% 3.1%    
  19.3% 24.9% 21.7%       -6.6% 16.6%
New Residential (2) 153.0 155.5 160.0 148.7 152.2 156.2 84.9 97.5
  3.3% 1.6% 2.9% 2.6% 2.3% 2.6%    
  18.2% 19.9% 21.0%       -7.4% 14.8%
Residential Improvements (3) 124.7 121.9 119.9 120.4 122.5 122.2 74.6 78.8
  3.2% -2.2% -1.7% 2.9% 1.8% -0.3%    
  7.9% 22.1% 9.3%       0.7% 5.5%
Total Residential (4) (5) 277.7 277.4 279.9 269.1 274.7 278.3 159.6 176.3
  3.3% -0.1% 0.9% 2.7% 2.1% 1.3%    
  13.2% 20.8% 15.5%       -3.8% 10.5%
Nonresidential Building 300.9 300.0 296.4 299.7 300.6 299.1 183.9 197.4
  -0.1% -0.3% -1.2% 0.4% 0.3% -0.5%    
  3.4% 4.8% 0.6%       -6.5% 7.3%
Heavy Engineering (Non-Building) 266.5 264.6 260.8 267.6 266.6 264.0 156.7 171.5
  -0.8% -0.7% -1.4% 0.3% -0.4% -1.0%    
  5.8% 8.4% 3.1%       -5.4% 9.5%
Total (1) 845.1 842.0 837.1 836.3 842.0 841.4 500.1 545.2
  0.8% -0.4% -0.6% 1.1% 0.7% -0.1%    
  7.3% 11.0% 6.1%       -5.3% 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
Positive economic reports are accumulating. September nonfarm payroll employment advanced 114,000 (SA) following a rise of 142,000 in August (revised from a 96,000 increase) and a 181,000 increase in July (revised from a 141,000 increase). Thus employment gains exceeded 100,000 each month in the third quarter following three months of gains below 100,000 per month in the second quarter. For the first three quarters of the year, employment increased an average of 146,000 per month. Meanwhile, the unemployment rate fell from 8.5% (SA) in December 2011 to 7.8% in September.

The housing market continues to exhibit strength. Historically, housing was one of the engines that helped drive the economy upward following a recession. This time, it was the rest of the economy that needed to pull housing out of a deep hole. Although housing is still well below a normal level of activity, it appears it has reached a tipping point where it is once more performing its historic role of propelling the economy forward. It is no longer a drag on growth, but a contributor. This is key since housing drives many parts of the economy both directly, through employment of construction workers and use of building materials, and indirectly through purchases by homebuyers of appliances, furniture, and other furnishings. It is our view that housing’s contribution to economic growth will continue and grow at least through the end of 2014. As residential construction improves, the rest of the economy benefits, including nonresidential construction.

Risks to the Economy and the Forecast
As always, there are risks to our forecast of moderate growth that could result in lower growth and the possibility of recession, which would mean considerable pain for commercial construction. The largest risk to our economy is the one we have least control over — Europe. The major risk from Europe is a European debt default. A debt default has the potential to ripple through financial markets, sending Europe into deep recession, harming U.S. banks, and dragging the United States into recession itself. Abandonment of the euro by one or more countries would have a negative effect on world growth in the short run. The United States would see the dollar driven higher, hurting U.S. exports. Our forecast assumes neither of these events will come to pass, but the risk remains.

The U.S. does have control over a pair of risks that emanate from Washington. Little has been done to address the expiration of tax cuts passed under President Bush at the end of this year (the fiscal cliff or slope, depending on your interpretation) or the need to raise the debt ceiling as federal debt continues to increase. There is a small group of congress people who are in discussion on how to avoid the fiscal cliff, but it is unlikely much will happen before the November election. We believe the fiscal cliff will be avoided and the debt ceiling will be raised, but in the meantime unnecessary uncertainty is being added to economic decision making.

The perennial threat of higher energy prices remains a major risk to the U.S. and world economies. Oil prices appear to have stabilized for now. However, a spike in prices of 50% or more, sustained for several months, would be sufficient to produce a U.S. recession.

The Forecast
The Reed Construction Data forecast, which assumes the aforementioned risks are avoided and therefore there is no recession, is for total construction spending to increase 7.7% in 2012, 7.5% in 2013, and 9.6% in 2014.

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

  Actual Forecast
  2009 2010 2011 2012 2013 2014
New Single-family 105.3 112.6 108.2 125.8 146.1 168.6
   Year-over-year % Change -43.3% 6.9% -3.9% 16.3% 16.1% 15.4%
New Multifamily (1) 35.9 24.1 22.6 27.4 33.7 38.5
-30.0% -32.9% -6.0% 20.9% 23.2% 14.1%
New Residential (2) 141.2 136.7 130.8 153.2 179.8 207.0
  -40.4% -3.2% -4.3% 17.1% 17.3% 15.2%
Residential Improvements (3) 112.7 112.5 114.9 119.8 124.9 133.6
-6.6% -0.2% 2.2% 4.3% 4.3% 7.0%
Total Residential (4) (5) 253.9 249.1 245.7 273.0 304.7 340.7
-29.0% -1.9% -1.4% 11.1% 11.6% 11.8%
Nonresidential Building 375.7 290.4 283.1 299.1 318.0 350.3
-14.2% -22.7% -2.5% 5.6% 6.3% 10.1%
Heavy Engineering (Non-Building) 273.5 265.0 249.4 266.4 278.6 297.0
  0.5% -3.1% -5.9% 6.8% 4.6% 6.6%
Total (5) 903.2 804.6 778.2 838.5 901.3 988.0
-15.4% -10.9% -3.3% 7.7% 7.5% 9.6%

(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.

by Bernie Markstein

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