In August, total spending on construction rose to a seasonally adjusted annual rate of $941.9 billion, a 0.8% increase from the July rate of 934.6 billion. Through the first eight months of the year, construction spending has totaled $629.5 billion, down 11.9% from the $714.3 billion spent in the first eight months of 2008.
Construction spending is a major component of investment in the GDP accounts, both in terms of residential investment and in non-residential fixed investment in structures. Residential and non-residential construction spending are now headed in opposite directions.
Residential construction rose by 4.7% in August to an annualized rate of $249.5 billion, while non-residential construction dropped a slight 0.1% to an annual rate of $372.6 billion. As the chart below (from http://www.calculatedriskblog.com/) shows, it is unusual to see non-residential spending exceed residential construction.
That said, residential spending got way out of hand during the bubble years. Residential spending is now down 63.1% from its peak in early 2006. On a year-over-year basis, it is still down over 25%, but is starting to turn upward every slightly. Non-residential construction, on the other hand, peaked much later and is down just 12.6% from its top last September, and is down 10.5% year over year.
There is currently a glut of most types of private non-residential structures. Vacancy rates are high and rising for office buildings and stores across the country. I would expect that non-residential construction will continue to fall off as existing projects are completed. My best guess is that non-residential construction eventually gets down to about the $275 to $300 billion level sometime in late 2011.
Residential construction spending has room to increase, as residential investment has fallen to a record low 2.67% of the economy in the second quarter (about 4.5% is normal). Given the amount of housing inventory out there, including the shadow inventory of delinquent mortgage holders who will eventually be foreclosed upon, it will probably take us some time to get back up to that sort of level, and we might never see the over 6% peaks as a share of GDP again in our lifetime.
But it is quite possible that residential spending could get back up to the $350 billion area by late 2011 or so. That would put spending about where it was in 2001, before adjusting for inflation. That would be welcome news for the major homebuilders like D.R. Horton (DHI) and Lennar (LEN).
Public construction actually fell by 1.1% in August to a seasonally adjusted annual rate of $319.8 Billion. Given the ramp-up in stimulus spending, one would expect that public construction would be rising, not falling.
However the Federal government is not the only player in public construction. States and Local governments are under severe budget constraints given falling tax revenues, since when retail sales fall so do sales tax revenues, and when housing prices fall, so do property taxes.
Thus, the smaller branches of government have to either raise taxes or cut spending, and the mood of the public is not exactly favorable towards higher taxes, as everyone is feeling poorer. Therefore they are trying to hold back on big construction projects.
The stimulus bill did specifically earmark money for both education and highway spending, and those two areas have held up pretty well, with education construction spending essentially flat and highway spending up 0.8% from July. Together those two categories accounted for 54.5% of all public construction spending in August.
Going forward, I would expect that total construction spending will be pretty close to flat for the next year or so, with declining non-residential spending offsetting a slow rise in residential construction spending. Just another facet of the sub-par recovery (a recovery, nonetheless) that we are likely to see over the next few years.
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