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June 4, 2007: No Letup in Nonresidential Spending, Despite Drop in Housing

June 4, 2007
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WASHINGTON - "Total construction spending inched up in April, as nonresidential outlays shook off the plunge in homebuilding and sluggishness in gross domestic product (GDP)," said Ken Simonson, chief economist for the Associated General Contractors of America (AGC). Simonson was commenting on the latest construction spending and GDP reports from the Commerce Department.

"Total construction spending eked 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 observed. "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 5 percent higher in the first four months of 2007 than in the January-April 2006 period," Simonson noted. "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 said. "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. Multifamily 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 multifamily will continue to weaken, and single-family won't improve until 2008."

Publication date: 06/04/2007

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