Construction Spending Declines despite Small Gain in Homebuilding

Construction Spending Declines despite Small Gain in Homebuilding

by Brian Lego

Private residential construction spending slipped 0.3% on a month-to-month basis in June, which represents the fourth such decline of the current calendar year. On a year-over-year basis, total spending activity for the private residential construction sector contracted 2.1%. June 2011 marked the 11th consecutive month in which spending fell compared to the previous year. The initial estimate for May was revised higher, but continued to show a 0.8% decline versus the previous month.

A slight gain in spending on new single-family homes (0.3%) was not enough to offset weaker readings for outlays on home improvements (-0.5%) and new multifamily units (-2.8%). Construction of new single-family homes continues to bounce along the bottom close to historic lows. Indeed, notwithstanding the large increase observed in June, single-family housing starts have struggled to gain any appreciable momentum during the past year.

Discerning a trend in the home improvement component of construction spending has been difficult due to large revisions in the data. Other indicators, namely the NAHB Remodeling Market Index and the Leading Indicator of Remodeling Activity, suggest remodeling demand is struggling due to a sluggish economy and a strict lending environment.

The level of spending on multifamily units has generally remained flat for the past year, multifamily starts and permits data show a more promising trend as this side of the residential market has bounced back from historic lows in construction activity. These indicators might seem in conflict with one another, but the spending data are lagged over several months of construction. As a result, multifamily construction spending should begin to turn higher.

Total construction spending advanced 0.2% in June as an increase in private nonresidential construction (1.8%) offset weaker readings for both residential and public sector (-0.7%) spending activity. Nearly all private nonresidential sectors posted gains this month, with commercial (3.1%), manufacturing and communication (both 4%) registering the largest month-to-month gains. Educational buildings (-4.1%) and roadways (-1.6%) were the main drivers of the decline in public sector construction outlays.

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