The truth about Construction Spending

U.S. Construction Spending Improvement Due to Nonresidential & Public Sector Gains
· Regrettably, recent gains in the value of construction spending have been limited, small and tenuous. The value of construction put-in-place unexpectedly increased 0.3% during March following five consecutive months of decline in excess of 3% each month. Consensus expectations had been for a 1.5% drop.
· A 2.0% jump in the value of nonresidential building activity accounted for much of the March surprise. The collapse of corporate profits, however, has dropped the y/y gain to just 1.7% after double-digit increases during the prior three years. The March increase reflected gains in the lodging (-5.1% y/y), commercial (-20.5 y/y), health care (+3.9% y/y), and educational (5.4% y/y) sectors.

· Public construction also was strong during March and posted a 1.1% increase. The recession's effect on tax revenues, however, seems to be taking hold. The small 2.6% year-to-year increase in the level of activity for March left the first quarter's level just equal to the 2008 average. The value of spending on transportation facilities did rise 1.7% in March but it was down 6.0% year-to-year while spending on highways & streets fell 0.8% (-2.2% y/y) and was down for the fourth straight month. The value of construction on highways & streets is roughly one-third of the value of total public construction spending.

· The value of residential building activity continued down hard and it posted a 4.2% decline, off by one-third over the last year. Notably hard hit has been single-family construction activity which fell 8.6% in March and is off by one-half during the last twelve months. Building activity on multi-family units has held up relatively well and posted a March decline of just 1.1% (-13.7% y/y). Spending on improvements fell 1.0% (-13.1% y/y).

· During the last twenty years there has been an 84% correlation between the q/q change in the value of residential building and its contribution to growth in real GDP.

· The more detailed categories of construction represent the Census Bureau’s reclassification of construction activity into end-use groups. Finer detail is available for many of the categories; for instance, commercial construction is shown for automotive sales and parking facilities, drugstores, building supply stores, and both commercial warehouses and mini-storage facilities. Note that start dates vary for some seasonally adjusted line items in 2000 and 2002, and that constant-dollar data are no longer computed.