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Construction Spending Gains Strength in October12/20/2012 by Bernard M. Markstein
Total Construction Spending and its Major Components
The U.S. Census Bureau reported that total construction spending powered up 1.4% in October to $872.1 billion at a seasonally adjusted annual rate (SAAR) after rising 0.5% in September, and marked the seventh consecutive monthly increase. October’s healthy growth was largely due to continued strong expansion in residential construction spending. The Census Bureau also revised up construction spending numbers for August by $9.7 billion (1.2% higher than reported last month) and for September by $8.8 billion (1.0% higher than reported last month). Year-to-date not seasonally adjusted (NSA) construction spending was up 9.3% compared to the same period a year ago.
Nonresidential building construction rose 0.8% to $302.8 billion (SAAR) in October following a 0.6% decrease in September (previously reported as a 1.4% decline, but revised up by $5.9 billion). On a year-to-date NSA basis, spending increased 6.6% from the same period in 2011.
Heavy engineering (non-building) construction spending crept up 0.2% to $268.5 billion (SAAR) in October following a 1.1% jump in September (revised up $3.0 billion). On a year-to-date NSA basis, spending was 8.5% higher than last year.
Total residential construction spending, which includes improvements, increased for the seventh consecutive month, soaring 3.0% to $300.8 billion (SAAR) after increasing 1.2% in September. New residential construction spending, which excludes improvements, rocketed up an even stronger 3.9% after shooting up 3.1% the previous month. Year-to-date total residential construction spending was up 13.3% from the same period a year ago, and new residential construction was up 17.4% from 2011.
Total public construction spending rose 0.8% (SA) in October after decreasing 0.1% in September. On a year-to-date basis, public spending was down 2.0% from the same period in 2011. Total private construction spending leapt up 1.6% in October, recording its eighth consecutive monthly increase, after rising 0.8% in September. On a year-to-date basis, private construction spending increased 16.0% compared to the same period a year ago.
U.S. Total Construction Spending
|Current Monthly||3-Month Moving Average||Year-to-Date (NSA)|
|Month-over-Month % Change||3.1%||3.6%||3.6%||2.6%||2.8%||3.4%|
|Year-over-year % Change (NSA)||20.8%||25.0%||29.3%||-5.5%||17.3%|
|New Multifamily (1)||28.1||28.3||29.8||27.7||28.0||28.7||18.9||22.2|
|New Residential (2)||159.7||164.6||171.1||156.0||159.9||165.1||109.1||128.0|
|Residential Improvements (3)||129.1||127.5||129.8||126.5||127.5||128.8||96.6||105.0|
|Total Residential (4) (5)||288.8||292.1||300.8||282.6||287.4||293.9||205.7||233.0|
|Heavy Engineering (Non-Building)||265.0||268.0||268.5||266.3||266.8||267.1||205.8||223.3|
Monthly levels are seasonally adjusted at annual rates (SAAR figures).
Following the December meeting of the Federal Open Market Committee (FOMC), the policymaking arm of the Federal Reserve, the FOMC released a statement explaining the factors that will guide it in deciding when to raise the federal funds rate, a rate that financial institutions charge each other for short-term loans and the FOMC uses to judge how much liquidity its actions are providing the financial markets. Until this meeting, the FOMC’s guide to its policy intentions had been calendar based, with the typical statement that it “anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.” (October 24, 2012 FOMC Press Release)
With the new guidance, the FOMC will maintain its current target range for the federal funds rate of 0% to ¼% until the unemployment rate drops to 6.5%, as long as the one- to two-year projection of inflation does not rise above 2.5%. This is more sensible and more useful than the previous “here’s when (a date) the FOMC expects to raise (or lower) rates” type guidance.
From a practical standpoint, the new FOMC guidance is essentially unchanged from previous FOMC statements. Given the slow rate of employment growth, it is unlikely that the unemployment rate, currently 7.7%, is likely to fall to 6.5% before 2015. What it does provide is explicit guidelines as to what is driving Fed monetary policy. This is in keeping with Federal Reserve Chairman Ben Bernanke’s efforts to increase transparency of the Fed and its monetary policy. As always, the Fed can change policy based on new information and the needs of the economy and the financial markets. The current guidance is helpful, but not set in stone. That is as it should be.
The FOMC also announced that it will extend its program of purchasing additional agency mortgage-backed securities and will make additional monthly purchases of longer-term Treasury securities in 2013. The former will support the housing market’s recovery, the latter will help keep long-term interest rates low, a benefit to business investment and commercial construction activity.
The economic outlook remains positive. Growth for third quarter real (inflation-adjusted) gross domestic product (GDP) was 3.1% (SAAR), up from second quarter’s 1.3%. Third quarter’s growth rate represents good, solid growth, though not as strong as is desired given the continued large pool of unemployment workers. The negative effects of Hurricane Sandy on the economy as reflected in the macroeconomic data have been negligible to date.
The United States economy is on a sustainable growth path. Reed Economics forecasts real year-over-year GDP growth for 2013 to be 2.7% and for 2014, 3.0%. This forecast is at the upper end of what other economists are forecasting, but roughly in line with them.
Risks to the Economy and the Forecast
The relatively positive economic outlook faces numerous risks including the following:
- Debt default by one or more European governments. The risk of sovereign debt default remains with Greece, Spain, and Italy the most likely candidates. The fear is that a debt default by one country would create pressure on other countries overburdened by debt and force/lead them to default on their debt. A single default by a small country such as Greece would be painful, but not fatal. A default by a larger country or more than one country would be a serious blow to financial institutions and markets worldwide. The result would be recession in all of Europe where several countries are already in recession and drag the U.S. economy down into recession as well.
Nobody wants this outcome. To date European policymakers have taken actions to avert a debt default. Although no truly long-term solution has yet to emerge, policymakers are likely to continue to make the necessary short-term moves to prevent a default.
- Abandonment of the euro. It is unlikely that Europe would give up on the euro altogether. It is possible that one or more countries would forsake the euro for its own national currency. Greece is the country that is most likely to abandon the euro voluntarily or involuntarily. The adverse effects on Europe of a single country shedding the euro, particularly a small country, are relatively minor and are more likely to be borne in the short run by the country casting off the euro, although it will likely benefit in the longer run.
- Going over the fiscal cliff — the return of tax rates to their 2000 level and across the board cuts in federal spending as of the beginning of 2013. As of this writing, negotiations to resolve the problem are ongoing between congress and the administration. It seems likely that an agreement will be hammered out. However, nothing is guaranteed and the risk of going over the cliff remains. The nation’s economy can tolerate a short period of falling off the cliff (more accurately sliding down a gentle slope that becomes steeper over time) if a resolution is on the horizon. Not resolving the issue in a timely manner would be sufficient to tip the U.S. economy into recession.
- Hitting the federal debt ceiling. As the federal government continues to run deficits, a situation that will not change even with an agreement to resolve the fiscal cliff issue, the debt increases, approaching the debt ceiling in early 2013. Reaching the debt ceiling would require many federal government operations to cease, hurting the economy. It does appear that any resolution of the fiscal cliff will include raising the debt ceiling. Nevertheless, as with the fiscal cliff, the risk of no action is real with negative fallout for the economy.
- Higher energy prices. The threat of rising energy prices has diminished of late. Nonetheless, the potential for a disruption of energy supplies (mainly oil) resulting in higher prices is always with us. Note that although higher energy prices are always painful and a drag on economic growth, it would take drastically higher prices (50% or more) for a prolonged period to do real damage to our economy.
Although we are reasonably confident that these risks will be avoided, failure to avoid any of these risks would lower our forecast and carry the potential for a U.S. recession.
The Reed Construction Data forecast assumes that the outlined risks are avoided. Total construction spending is projected to rise 9.0% in 2012, 9.0% in 2013, and 9.3% in 2014.
U.S. Total Construction Spending
|Year-over-year % Change||-43.3%||6.9%||-3.9%||19.3%||22.4%||15.7%|
|New Multifamily (1)||35.9||24.1||22.6||27.1||33.3||38.0|
|New Residential (2)||141.2||136.7||130.8||156.2||191.3||220.7|
|Residential Improvements (3)||112.7||112.5||114.9||123.6||134.2||145.0|
|Total Residential (4) (5)||253.9||249.1||245.7||279.8||325.5||365.7|
|Heavy Engineering (Non-Building)||273.5||265.0||249.4||268.5||283.1||302.1|
(1) New Multifamily = New Private Multifamily + New Public Multifamily - Public Improvements