Construction Spending Dragged Down by Housing Sector

Construction spending on nonresidential projects – including school projects – remained strong in July. Reduced residential spending is proving to be a drag on overall spending, however, as July’s totals are down slightly from June.

Spending was at a seasonally adjusted annual rate of $1.084 trillion, 0.6 percent below the revised June estimate of $1.091 trillion. The July figure is 4.8 percent below the July 2007 estimate. During the first seven months of this year, construction spending amounted to $614.2 billion, 5.4 percent below the $649.5 billion for the same period in 2007.

“Although the headline figure showed a drop of 0.6 percent in total construction put in place in July, the bad news was limited to residential spending, which tumbled 2.1 percent,” Ken Simonson, Chief Economist for The Associated General Contractors of America (AGC), said. “The report included a huge upward revision in June and May nonresidential spending, and yet the July figure was still 0.2 percent higher than the new June total.

Spending on private construction was at a seasonally adjusted annual rate of $774.6 billion, 1.4 percent below the revised June estimate of $785.9 billion. Residential construction was at a seasonally adjusted annual rate of $357.8 billion in July, 2.3 percent below the revised June estimate of $366.1 billion. Nonresidential construction was at a seasonally adjusted annual rate of $416.8 billion in July 0.7 percent below the revised June estimate of $419.8 billion.

In July, the estimated seasonally adjusted annual rate of public construction spending was $309.7 billion, 1.4 percent above the revised June estimate of $305.4 billion. Educational construction was at a seasonally adjusted annual rate of $87.4 billion, 2.5 percent above the revised June estimate of $85.3 billion. Highway construction was at a seasonally adjusted annual rate of $76 billion, nearly the same as the revised June estimate of $76 billion.

“Nonresidential construction spending continued growing in July, despite the weak economy and housing slump,” Simonson said. “Year-to-date figures comparing the first seven months of 2008 and 2007 show how broad-based the nonresidential strength is. Total nonresidential spending through July was 14 percent ahead of the year-ago total, and 15 of the 16 Census categories — all but religious structures — rose.

Simonson said the most robust category so far this year has been manufacturing, which jumped 46 percent, due in part to some massive refinery projects but also steel, cement and other plants. Simonson expects this work to continue at a high level through 2009.

“Power construction — power plants, transmission lines and wind farms — jumped by a third through July and may accelerate further in 2009 as more projects move from design and permitting into construction,” Simonson predicted. “However, wind turbine projects will halt soon if Congress doesn’t renew the production tax credit.

Simonson said another category that needs congressional intervention is highway funding.

“The steep drop in gas tax receipts this year means federal highway trust fund payments to states may be delayed as early as next month,” Simonson warned. “If that happens, contractors will be forced to lay off workers by November.”

Source: Commerce Department