AGC economic report: Symmetrical split in construction spending in April; no letup in nonresidential, despite drag from housing, GDP
"Total construction spending inched up in April, as nonresidential outlays shook off the plunge in homebuilding and sluggishness in gross domestic product (GDP)," reports Ken Simonson, chief economist for the Associated General Contractors of America (AGC), Simonson bases his comments on the May 31 construction spending and GDP reports from the U. S. Commerce Department.

"Total construction spending carved out a gain of 0.1 percent in April, seasonally adjusted, but fell 2.5 percent for the first four months of 2007 compared to the same period in 2006," Simonson says. "Over both periods, there was a nearly symmetrical split between residential and nonresidential spending. The former fell 0.9 percent for the month and 15 percent year-to-date, while the latter rose 1.1 percent in April and 14 percent year-to-date.

"Even though GDP grew only 0.6 percent net of inflation in the first quarter, many nonresidential construction categories are catching up from past inactivity or building for the long term. For instance, construction of hotels and resorts, which nearly stopped early in the decade, jumped 4.5 percent in April and 56 percent in the first four months of 2007 combined. Other big year-to-date private-sector gainers included offices, up 32 percent; communication, 19 percent; and hospitals and multi-retail (general merchandise stores, shopping centers and malls), both up 18 percent. I think many of these categories will remain robust through 2007, although retail and office construction are vulnerable to a slowdown.

"Spending in every public category was at least five percent higher in the first four months of 2007 than in the January-April 2006 period," Simonson says. "The two big public categories--highways and streets, and education--accounted for just over half the public total. Highway construction was 12 percent higher year-to-date, and education was up 8.3 percent. For 2007 as a whole, public construction should remain positive, but higher materials costs are likely to cut into the number of contracts that agencies can award.

"Private residential spending figures were universally negative in April," Simonson commented. "Single-family construction ticked down less than 0.1 percent for the month but was 27 percent lower over the first four months of the year than in the same period of 2006. Multi-family was down 1.8 percent in April, although the year-to-date figure is still up by 1.2 percent. Residential improvements, which Commerce unfortunately does not break out monthly, slipped 2.5 percent for the month, although it's up 15 percent year-to-date. I'm afraid multi-family will continue to weaken, and single-family won't improve until 2008."

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Commercial construction marches ahead
Associated General Contractors’ chief economist Ken Simonson expects nonresidential construction to remain positive throughout 2007.

“Total construction spending rose a tad in March following a big upward revision for February, as single-family homebuilding finally held steady and nonresidential construction boomed again,” says Simonson. He is basing that prediction on the April 30 construction spending report from the Census Bureau.

“Total construction spending rose 0.2 percent in March, seasonally adjusted, while the gain for February was revised from 0.3 percent to a huge 1.5 percent,” Simonson remarked. “New private single-family construction edged up 0.1 percent for the month, though it was down 27 percent from a year ago. The next largest category, the hard-to-measure residential improvements, more than reversed a big February gain but were still 19 percent ahead of the March 2006 total. New multi-family construction showed modest gains for both periods—up 0.2 percent for the month and 1.5 percent year-over-year.

“Private nonresidential surged another 2.4 percent for the month and 17 percent year-over-year,” Simonson continued. “All 11 of the Census Bureaus’ categories were up for the month and all but religious structures were up from March 2006. Categories or subcategories that did even better compared to March 2006 included lodging, up 59 percent; offices, 31 percent; the multi-retail portion of commercial (general merchandise stores, shopping centers and malls), 23 percent; electric power, 22 percent; communication, 20 percent; and hospitals, 18 percent.

“Public construction was up 0.4 percent from February and 9 percent from March 2006,” Simonson observed. “The two big public categories—highways and streets, and education—were 11 percent and 9 percent higher than a year before, respectively. The next largest public category, transportation facilities, was up 8 percent despite a big drop this March.

“For 2007 as a whole, I expect the biggest private gainers to be power and energy-related projects, some of which Census includes in manufacturing; lodging; and hospitals,” Simonson says. “The office market may cool if sluggish overall economic growth causes big firms to slow hiring of office employees and the small-office market loses real estate agents, mortgage brokers and title companies as I anticipate. That market, along with some retail construction, will be dragged down by a continuing steep decline in new single-family construction. Public construction should remain modestly positive but will be pressured by rising costs for construction materials and components.”

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Construction spending inches up in March
Construction spending during March 2007 was estimated at a seasonally adjusted annual rate of $1.2 trillion, 0.2 percent above the revised February estimate, according to the Department of Commerce. The March figure is 2 percent below the March 2006 estimate.

During the first three months of this year, construction spending amounted to $250.3 billion, 2.4 percent below the $256.5 billion for the same period in 2006.

Commercial construction spending increased 1 percent to $86.6 billion in March from $85.7 billion during February. The March 2007 total was also up 10.5 percent from the March 2006 total of $78.3 billion.

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