Total Construction Spending fell in July to a seasonally adjusted annual rate of $805.2 billion, down 1.0% from June, and down 11.7% from a year ago. The decline was greater than the 0.7% decline that was expected. In addition, June was revised down to be 0.8% below May rather than the 0.1% increase originally reported.
The downward revision to June’s figures means that when we get the final look at the second quarter GDP numbers, it will show even less growth than the 1.6% currently estimated. It also means that we are not off to a good start for the third quarter.
Construction spending has been a persistent thorn in the side of economic growth for most of this recession, although it did actually contribute positively to the second quarter growth (just barely) based on the current estimates, but now it looks like it will be revised to a small drag on growth in the second quarter.
Year to date, construction spending has totaled $460.3 billion, down 11.8% from the $522.0 billion spent on construction in the first seven months of 2009.
For the month, private construction fell to an annual rate of $506.4 billion, a decline of 0.8% from June and off 12.2% from a year ago. Private construction comes in two basic flavors, residential and non-residential. Residential construction spending fell to an annual rate of $240.3 billion, off 2.6% from June, but up 5.5% from a year ago. The year-over-year gains are probably due to the now expired home-buyer tax credit.
Construction Spending Only to Fall Further
Based on recent trends in new home sales, housing starts and building permits, expect to see residential construction spending fall further in the months to come. The home builders like D.R. Horton (DHI) and Beazer (BZH) still have a rough road in front of them. Eventually the current overhang of excess housing supply will get absorbed, but that is not likely to happen in the near future.
Non-residential construction edged up by 0.8% on the month to an annual rate of $266.1 billion, but it has plunged 23.7% from a year ago. I doubt that this month’s increase is a fundamental change in direction. It would be nice if it were, but I doubt it is. More than all of the total increase in non-residential construction spending came from the Power sector, as utilities continue to upgrade their power plants and install more renewable sources of energy.
Public construction also fell to an annual rate of $298.8 billion, a 1.2% decline from June and 7.9% below last year. Given the massive overcapacity in the construction industry due to lack of private demand, the decline in public construction spending is just plain inexcusable. There are massive public sector needs to repair our infrastructure that are going unmet.
Public Works in the Works?
Now would be a great time to catch up on the decades of deferred maintenance of our infrastructure. It would put people to work and there would be absolutely no crowding out of the private sector. That, however, would require that Congress actually appropriate some money to do it. Better infrastructure would have a positive long-term return on investment for the economy as well as stimulating the economy right now.
If properly directed, it could also make a dent in the country’s energy consumption. For example, we might undertake a program of retro-fitting public school buildings to make them more energy efficient.
The graph below (from http://www.calculatedriskblog.com/) tracks private construction spending since 1993. Note that residential construction is normally much larger than non-residential spending, although eh housing bubble pushed residential construction spending to abnormally high levels relative to non-residential spending. I suspect that pattern will re-emerge, but due to non-residential spending continuing to decline, rather than by any near-term rebound in residential investment spending.
Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market beating Zacks Strategic Investor service.
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