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July 10, 2006: Construction Spending Drops but There Are Bright Spots

July 10, 2006
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WASHINGTON - "Construction spending dropped in May for the second straight month but there are plenty of bright spots amidst the gloom," said Ken Simonson, chief economist for the Associated General Contractors of America (AGC). Simonson was commenting on the latest report from the Census Bureau that showed the value of construction put in place fell at a seasonally adjusted annual rate of 0.4 percent in May, following a dip of 0.2 percent in April.

"Private residential construction dropped 0.8 percent and private nonresidential spending fell 0.3 percent for the month, more than offsetting a rise of 0.7 percent in public construction," Simonson observed. "But nonresidential construction remained much stronger than a year ago. Private nonresidential construction was down slightly from April to May but up 13 percent compared to May 2005. Every category was in the plus column year-to-date.

"For instance, manufacturing spending slipped 1.7 percent in April but was 33 percent higher than in May 2005," Simonson commented. "For the first five months of 2006 combined, manufacturing construction was up 25 percent compared to the same months of 2005. The broad commercial category fell 0.8 percent from April to May but was 10 percent higher year-to-date, led by a 55 percent jump in shopping centers and a 17 percent gain in general commercial warehouses.

"The two leading public categories - highway and street, and educational - rose 0.1 percent and 0.5 percent for the month," Simonson continued. "Year-to-date highway spending was up 15 percent, boosted by exceptionally mild weather in the winter and early spring of 2006 and by steep increases in asphalt, diesel fuel, and concrete prices. Educational spending was up 7.5 percent in January-May 2006 compared to the same months of 2005.

"Private residential spending fell for the second straight month but remains 2.4 percent higher year-to-date," Simonson noted. "As builders work through the backlog of unbuilt homes that they have already sold, private residential construction is likely to tail off further.

"Private nonresidential construction appears to have plenty of momentum for the rest of 2006 and into 2007," the AGC economist said. "A variety of manufacturing, energy and power, hospital, and retail projects will lead the way. Office construction is picking up in more markets. The soft spots appear to be such retail categories as auto dealers and food and beverage establishments.

"Public construction is still growing but may slow as more agencies find their budgets will not cover the leap in construction costs," Simonson warned. "More projects are likely to be canceled or redesigned as costs for paving materials, metals, and plastics keep rising at double-digit rates."

Publication date: 07/10/2006

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