Bottom Line
œ Construction spending fell 1.2% in October.
œ Spending levels for August and September were revised up.
œ Private construction dropped 2.0%; public construction rose 0.7%.
œ Single-family home construction fell 4.6% (the 31st-straight monthly drop). Multi-family construction slipped 0.3%.
œ Private nonresidential construction fell 0.7%, but data revisions raised the estimates for August and September.
œ Public construction spending for August and September was also revised up.
œ Real GDP growth in the third quarter will be revised up 0.2 percentage point, based on October's construction estimates.
Outlook
This was a mixed report. Spending in October was down. But data revisions raised the estimates for August and September.
Single-family construction fell 4.6%--the 31st-straight monthly drop. This estimate is based on the number of single-family homes started over the past 12 months. Single-family housing starts fell 3.3% in October, but will likely plunge over the next two months since single-family permits, a leading indicator for starts, fell 12.7% in October.
Multi-family construction slipped 0.3%, after increasing 2.2% in September. This category is volatile but appears to be on a downward trajectory. Indeed, credit to this sector is drying up, so spending on multi-family units may soon be falling at double-digit annualized rates.
Nonresidential construction slipped 0.7% but the estimates for August and September were revised up. October's increase appears to be related to projects started long ago that may no longer be viable. For example, spending on commercial building rose 1.2% because of a 25.5% increase in spending on auto dealerships and an 18.7% increase in shopping malls. These categories are likely to take a big hit in 2009 because of overbuilding during this latest expansion.
Going forward, businesses have few reasons to start new buildings or renovate existing ones. The economy is in recession, job losses are mounting, too many hotels, malls, and auto dealerships were put up during the most recent expansion, the securitization market for commercial real estate loans is totally frozen, commercial real estate prices are dropping, and credit is tight. As a result, spending on nonresidential construction is about to hit a wall.
Public construction posted its eighth increase in nine months. Recent gains, however, have been modest, and, after adjusting for inflation, negligible.
Going forward, all four major construction categories—single-family, multi-family, nonresidential, and public construction—will likely be dropping by the end of the year—and if not then, by the first quarter of next year.
