August Construction Spending Beats Expectations

By Daniel Indiviglio

August was a slightly better month for construction spending than July, but it remained very, very weak. After hitting a 9-year low in July, it rose by 0.4% in August, according to the Census Bureau. Constructing spending also surprised economists, who actually expected it to decline further. Although the rise was slight, the sector has been one of the hardest hit with job losses, so even a small increase will help.

Let's start with the chart:

construction spending 2010-08.png

Again, it's easy to see just how far construction spending has fallen. The mountain that peaks in 2006 was mostly due to the real estate bubble. Although the common view is that this was all due to housing, it's important to note that commercial real estate also experienced a mini-bubble due to the general rise in economic activity. Both sub-sectors have suffered since the economy collapsed a few years ago.

Breaking down the components of construction spending, the news looks a little less optimistic. In fact, total private construction spending declined by 0.9% during August -- and was 14.8% lower than a year earlier. The month-over-month drop was mostly due to a 1.4% decline in nonresidential construction spending, but residential spending also fell by 0.3%.

So why did construction ultimately rise? Public construction spending jumped 2.5% compared to July. That was due mostly to non-residential spending, which makes up the vast majority of public construction. The public non-residential component increased by 2.4% during the month.

As mentioned, economists were way off this month. They expected overall construction spending to fall to an annualized rate of around $801 billion. In fact, it rose to $811 billion. Presumably, they didn't anticipate the big bump provided by public construction. If considering just private spending, then their prediction of a decline would have been on the right track.

This article available online at:

http://www.theatlantic.com/business/archive/2010/10/august-construction-spending-beats-expectations/63906/