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Home » Sept. 5, 2007 - Spending falls in July despite nonres surge; signs are mixed for roads, plants, utilities

Sept. 5, 2007 - Spending falls in July despite nonres surge; signs are mixed for roads, plants, utilities

September 5, 2007
Ken Simonson
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Construction spending sank 0.4% in July, seasonally adjusted, to $1.169 trillion, the Census Bureau reported today. For the first seven months of 2007 combined, construction spending was down 3.4% from the year-to-date (YTD) total in 2006. Private residential construction tumbled 1.4% for the month and 18% YTD, as new single-family spending dropped 2.2% and 27%, and multi-family fell 1.1% and 2.2%.

Private nonresidential spending climbed 0.4% and 17%, apparently untouched so far by either the housing meltdown or the credit market turmoil that accelerated in July. The three most speculative components-commercial, office and lodging-all advanced. Commercial construction was up 0.6% for the month and 15% YTD. The two biggest commercial subcomponents-multi-retail (“big box” and other general merchandise stores, shopping centers and malls) and warehouses-both leaped 4% in July and 18% YTD. Private office construction climbed 0.6% and 22%, and lodging shot up 0.8% and 60%. Other strong gainers included power, up 0.5% and 19%, and private health care (principally hospitals), up 1.3% and 13%. Communication fell 2.2% for the month but rose 21% YTD.

Public construction was up 0.7% in July and 11% YTD. The biggest component, education, rose 1.9% and 12%. But highway and street construction, which received a big boost in 2006 from the August 2005 enactment of the federal authorization law known as SAFETEA-LU, was down 0.8% for the month and was only 5% higher YTD.

The slower highway spending may reflect both lower costs for inputs such as diesel fuel and asphalt, and a bleaker funding outlook. The Energy Information Administration (www.eia.doe.gov) reported today that the national average retail price for diesel fuel was $2.89 per gallon on September 3, down 7 cents (2.5%) from one year ago.

The Congressional Budget Office today projected that the Highway Account of the federal Highway Trust Fund, the source for the federal share of state road construction funds, will be $4.3 billon short of the amount needed to pay for the spending assumed in SAFETEA-LU, by the end of fiscal 2009. This estimate, which corrects a projection issued last week and matches the Bush Administration’s projection issued in July, would require a roughly 40% cut in new federal-aid funds beginning in October 2008, unless Congress changes the law or comes up with additional revenue.

One spending category that showed moderate growth was manufacturing construction, up 0.4% for the month and 8.2% YTD. New indicators from Census and the Institute for Supply Management (ISM) are ambiguous about future demand for manufacturing structures.

On Friday, Census said that new orders from U.S. manufacturers (excluding semiconductor manufacturing) climbed 3.7% in July. But the YTD total was level with the first seven months of 2006. Orders for construction materials and supplies rose 0.8% for the month but fell 2.6% YTD. Orders for construction machinery, an often volatile category, leaped 58% in July but were off 25% YTD. Today, ISM reported that respondents to its monthly survey of manufacturing purchasing executives reported growth in August in new orders and current production, but by the smallest margin in five months. Respondents listed these items that are important to construction as being up in price: aluminum, copper, steel and freight. Nickel, used in making stainless steel, was reported down in price.

An article in today’s Washington Post calls into question how much electric power plant construction will expand. “A year after the nation appeared to be in the middle of a coal rush, widening alarm about greenhouse gas emissions has slowed the efforts of electric companies to build coal-fired power plants from the hills of eastern Montana to southern Florida [, where applications for two plants were withdrawn or rejected recently.] A combination of rising construction costs, state mandates for the use of renewable energy and lawsuits by environmental organizations have forced many utilities to drop or postpone coal projects this summer. [In Kansas and Colorado] two cooperatives have scaled down [their planned three-plant] project to two units….According to the Edison Electric Institute, the utility industry spent more than $22 billion on electricity generation last year and was expected to spend more this year. That money has, however, been increasingly given to wind and natural gas projects…” Utilities are also spending on transmission lines and retrofits to existing plants.

The rate of house price appreciation slowed to 0.1% in the second quarter and a little more than 3% over the past four quarters, according to calculations by Freddie Mac, released today, and the Office of Federal Housing Enterprise Oversight (OFHEO), on Thursday. Both use a database of 34 million resales and refinances of houses involving loans guaranteed by Freddie Mac or Fannie Mae (“conventional, conforming” loans), which omits less-than-prime and “jumbo” loans. Freddie Mac said house values rose 0.4%. OFHEO said four-quarter appreciation was highest in Utah, 15%; Wyoming, 13%; Washington, Montana and New Mexico, 9%; and slowest in Rhode Island, Massachusetts, California, Michigan and Nevada, all -1%.

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Recent Articles by Ken Simonson

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Construction jobs shrink in May, April construction spending rises

Chief Economist, Associated General Contractors of America 703-837-5313; fax -5406; www.agc.org

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Sept. 12, 2007 - Nonresidential jobs climb despite overall slide; Reed, Beige Book imply more growth

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