Construction Spending in U.S. Fell 0.6% in November

Construction spending totaled $900 billion in November, the lowest level since July 2003.

Construction spending in the U.S. fell for the seventh straight month in November to the lowest level in more than six years, led by declines in homebuilding and fewer commercial projects.

The 0.6 percent drop followed a revised 0.5 percent decrease in October, previously reported as unchanged, Commerce Department figures showed today in Washington. Construction spending was down 13 percent in November from the same month a year earlier.

Rising office vacancies and plant-use rates close to a record low may discourage new commercial projects, indicating construction will be a drag on the economic recovery. While home sales have stabilized, the threat of more foreclosures will keep residential building muted.

“Further weakness is expected in the months ahead,” said Steven Wood, president of Insight Economics LLC in Danville, California. “Homebuilding has begun an irregular recovery, while non-residential construction is contracting because of rising vacancy rates, falling rents and tight credit.”

Economists forecast spending would fall 0.5 percent, according to the median of 49 projections in a Bloomberg News survey. Estimates ranged from a drop of 1.3 percent to a gain of 1.8 percent.

A separate report today showed manufacturing in the U.S. expanded in December at the fastest pace in more than three years. The Institute for Supply Management’s factory index rose to 55.9, the highest level since April 2006.

Construction spending totaled $900 billion in November, the lowest level since July 2003.

Residential Construction

Private residential construction spending dropped 1.6 percent in November, the most since June, after a 4.8 percent surge a month earlier. Compared with November 2008, it was down 19 percent.

Non-residential construction, including public projects fell 0.2 percent. It was down 11 percent from 12 months earlier. Privately funded non-residential construction eased to $330.5 billion, the lowest level since January 2007, from $330.6 billion.

Public construction decreased 0.4 percent in November, led by health care, power and highway and street projects.

While the extension of a federal tax credit for first-time homebuyers may help sustain demand for homes in coming months, tight bank credit and more foreclosures may limit construction of new homes as well as economic growth.

Fed’s Kohn

“Lingering credit constraints are a key reason why I expect the strengthening in economic activity to be gradual,” Federal Reserve Vice Chairman Donald Kohn said yesterday in a speech to the American Economic Association in Atlanta.

Foreclosure filings probably reached a record for the second straight year in 2009, with 3.9 million notices sent to homeowners in default, RealtyTrac Inc. said Dec. 10.

A report from the Commerce Department on Dec. 16 showed starts of new homes rose 8.9 percent in November, signaling a housing market that’s stabilized since its collapse during the recession.

“We don’t know how fast we’re coming back, but we do know we’re coming back,” Robert Toll, chief executive of Horsham, Pennsylvania-based Toll Brothers Inc. said Dec. 11 in a Bloomberg Television interview. “There’s a pretty good reservoir of pent-up demand.”

The largest U.S. luxury-home builder, projected a week earlier that deliveries may fall by as much as 33 percent in the 12 months through October 2010, and the average selling price may drop to as low as $540,000.

“We believe it may take some time for Americans to regain confidence in our economy, their job status and the benefits of home ownership,” Toll said in a Dec. 3 statement.

Commercial Construction

Non-residential construction may continue to struggle. The commercial mortgage default rate on loans held by U.S. banks more than doubled to 3.4 percent in the third quarter as vacancies rose and rents declined, Real Estate Econometrics LLC said Dec. 1. Defaults in the first nine months of 2009 were the highest since 1993, the firm said.

Commercial real estate remained a problem area for the economy from October to mid-November, with markets and construction “depicted as very weak and, in many cases, deteriorating,” the Fed said Dec. 2 in its Beige Book report.

While most regions in the U.S. reported increased home sales, new construction was “generally characterized as weak,” with three districts showing “some pickup” in homebuilding, two reporting declines and three saying it was “flat or stabilizing.”

Source: Bloomberg News, Courtney Schlisserman