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Construction Spending Continues to Fall in February

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The U.S. Census Bureau reported that total construction spending dropped in 1.1% February after falling 0.8% in January. February total construction spending was $808.9 billion at a seasonally adjusted annual rate (SAAR). However, year-to-date not seasonally adjusted (NSA) construction spending was up 7.4% from the same period last year.

Total Construction Spending and its Major Components
The U.S. Census Bureau reported that total construction spending dropped in 1.1% February after falling 0.8% in January. February total construction spending was $808.9 billion at a seasonally adjusted annual rate (SAAR). However, year-to-date not seasonally adjusted (NSA) construction spending was up 7.4% from the same period last year.

Nonresidential building construction spending fell in February to $282.1 billion (SAAR), a decrease of 1.4%, following a 1.3% decline in January. Nonetheless, on a year-to-date basis NSA spending was up 8.9% from a year ago.

Heavy engineering (non-building) construction spending fell 1.9% to $273.3 billion (SAAR) following a 0.9% decrease in January. On a year-to-date basis, spending was up 7.9% NSA from the same period in 2011.

Total residential construction spending, which includes improvements, was flat at $235.5 billion after slipping 0.1% in January. New residential construction spending, which excludes improvements, decreased 1.0% after rising 2.1% in January. Total residential construction spending was up 4.9% year-to-date compared to the same period a year earlier, while new residential construction was up 7.4%.

Total public construction spending fell 1.7% in February after inching up 0.1% in January. On a year-to-date basis, spending was down 0.1% from a year ago. The outlook for public spending is for further declines as local governments struggle to balance their budgets and as Congress strives to reduce the federal government’s deficit. Total private construction spending decreased 0.8% in February, only its second monthly decline in the previous seven months, following January’s 1.3% fall. On a year-to-date basis, private construction spending still advanced 11.5% over the same period last year.

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

  Current Monthly 3-Month Moving Average Year-to-Date (NSA)
  Dec-11 Jan-12 Feb-12 Dec-11 Jan-12 Feb-12 Jan-10 to
Dec-10
Jan-11 to
Dec-11
New Single-family 110.8 113.2 111.5 109.0 110.9 111.8 14.3 15.3
  Month-over-Month % Change 1.8% 2.2% -1.5% 1.2% 1.8% 0.8%    
  Year-over-year % Change (NSA) 3.7% 5.8% 8.9%       -5.7% 7.3%
New Multifamily (1) 22.8 23.2 23.5 22.6 23.0 23.2 3.3 3.5
  -0.4% 1.7% 1.2% 0.2% 1.6% 0.8%    
  1.7% 5.4% 10.1%       -10.4% 7.8%
New Residential (2) 133.6 136.5 135.0 131.6 133.9 135.0 17.5 18.8
  1.4% 2.1% -1.0% 1.0% 1.7% 0.8%    
  3.4% 5.7% 9.1%       -6.6% 7.4%
Residential Improvements (3) 120.1 117.0 118.4 119.8 119.5 118.5 14.3 14.6
  -1.0% -2.6% 1.2% 2.3% -0.3% -0.8%    
  10.2% -1.0% 5.0%       -2.0% 1.9%
Total Residential (4) (5) 253.7 253.5 253.5 251.5 253.4 253.5 31.9 33.4
  0.3% -0.1% 0.0% 1.6% 0.8% 0.1%    
  6.4% 2.7% 7.3%       -4.6% 4.9%
Nonresidential Building 289.8 286.0 282.1 285.8 287.4 285.9 38.4 41.8
  1.2% -1.3% -1.4% 0.3% 0.5% -0.5%    
  8.0% 9.4% 8.3%       -13.4% 8.9%
Heavy Engineering (Non-Building) 281.3 278.6 273.3 276.7 278.9 277.8 33.5 36.1
  1.7% -0.9% -1.9% 1.4% 0.8% -0.4%    
  2.3% 8.1% 7.8%       6.1% 7.9%
Total (5) 824.8 818.1 808.9 814.0 819.6 817.2 103.7 111.3
  1.1% -0.8% -1.1% 1.1% 0.7% -0.3%    
  5.5% 6.9% 7.8%       -5.1% 7.4%

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
Recent economic reports have not been as positive as previous reports. Nonfarm payroll employment increased a disappointing 120,000 in March (SAAR) following three months of increases in excess of 200,000. The unemployment rate in March did fall from 8.3% to 8.2%, but that was due more to a reduction in the labor force as discouraged workers ceased looking for work and therefore were not counted as part of the workforce than from rising employment.

The less than positive data reports on employment and other measures may be the result of the unusually mild winter/warm early spring in much of the country. The favorable weather allowed some economic activity, such as construction, to be pulled forward. The seasonal adjustment process may have inflated the reports of that activity for December, January, and February. Now, that same seasonal adjustment process may make it appear that activity slowed in March and April relative to previous months when it has not. The May and June data will help determine the extent of this effect and give us a clearer picture of the economy. Regardless, the economy still appears to be on a reasonable growth path, turning in respectable if not spectacular numbers.

Risks to the Economy and the Forecast
Europe continues to muddle through its problems, with Spain the current focus. Although Europe is able to work through its immediate problems as they crop up, the failure to provide any solid long-term solutions means that developments in Europe remain a risk to the U.S. economy.

High energy prices are another risk to the health of the U.S. and world economies, though that risk has fallen of late. Oil prices have flattened and declined recently, suggesting that the most recent upward pressure on oil prices is lessening for now. But as always, a prolonged, spike in oil prices (higher than recently experienced) would hurt consumers and adversely affect the growth of the economy, possibly pushing the U.S. into recession.

Political paralysis in Washington is a major factor, and consequently risk, affecting our forecast. The inability to reach a compromise and move forward on even the most basic issues such as annual funding bills is disheartening at best. The approaching election (still more than six months away!) is further complicating any reasonable action. Knowing what legislation will be passed and when complicates the forecast. Transportation funding is just the latest example. At the end of March a 90-day extension of transportation funding was passed, the ninth temporary extension to take effect since the last long-term funding authorization expired in September 2009.

The Forecast
Assuming no recession, the Reed Construction Data forecast is for total construction spending to increase 4.5% in 2012 and 5.7% in 2013. The forecasted growth rate for 2012 is significantly reduced from last month’s 7.0%.

A number of factors contributed to the reduced forecast. The Census Bureau revised down December and January construction spending numbers — $2.86 billion and $8.92 billion, respectively. The December revision was largely concentrated in residential construction spending, the January revision in residential and heavy engineering. Those revisions, coupled with the poor February construction spending numbers for heavy engineering and nonresidential building construction, accounted for much of the downward revision in the 2012 forecast. We also have been revising down our (relatively) optimistic outlook for federal infrastructure spending, which adversely affected both the 2012 and 2013 heavy engineering forecast numbers.

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

  Actual Forecast
  2008 2009 2010 2011 2012 2013
New Single-family 185.8 105.3 112.6 106.7 114.5 122.7
   Year-over-year % Change -39.1% -43.3% 6.9% -5.2% 7.3% 7.1%
New Multifamily (1) 51.2 35.9 23.7 22.1 24.1 27.1
-8.1% -30.0% -34.0% -6.6% 8.7% 12.5%
New Residential (2) 237.0 141.2 136.2 128.9 138.5 149.7
  -34.3% -40.4% -3.5% -5.4% 7.5% 8.1%
Residential Improvements (3) 120.7 112.7 112.5 116.6 119.7 124.8
-13.5% -6.6% -0.2% 3.7% 2.6% 4.2%
Total Residential (4) (5) 357.7 253.9 248.7 245.5 258.3 274.5
-28.5% -29.0% -2.1% -1.3% 5.2% 6.3%
Nonresidential Building 437.7 375.7 288.9 278.1 289.0 312.3
8.4% -14.2% -23.1% -3.7% 3.9% 8.1%
Heavy Engineering (Non-Builidng) 272.1 273.5 266.0 266.2 277.9 285.1
  9.7% 0.5% -2.8% 0.1% 4.4% 2.6%
Total (5) 1,067.6 903.2 803.6 789.8 825.2 871.9
-7.4% -15.4% -11.0% -1.7% 4.5% 5.7%

(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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