Construction Spending Weak Across the Board

Bottom Line

• Construction spending fell 0.6 percent in January.
• Excluding improvements — a category that is badly estimated — spending fell 1.5 percent.
• Private construction and public construction were down 0.6 percent and 0.7 percent,  respectively.
• Single-family home construction slipped 0.2 percent — after posting seven straight solid gains.
• Multi-family housing construction fell an eye-popping 11.1 percent. On top of this, the estimates for November and December were both revised down.
• Private nonresidential construction fell 2.1 percent and January's estimate was revised to show a 0.7 percent loss (instead of a 0.2 percent gain).

Outlook

We recommend excluding residential improvements in evaluating this report, because improvements are badly estimated (for that reason, they are not itemized). Excluding residential improvements, which jumped 4.7 percent, construction spending fell 1.5 percent in January.

This report sheds further light on a number of ongoing trends. A key one is the profile for single-family home construction, which dropped for the first time in eight months. The estimate for this category is based on a weighted average of single-family housing starts, which improved in the first half of 2009, but have flattened in recent months. The outlook for single-family starts over the next few months will be a bumpy one since new homes sales have dropped three straight months — to a record low in January (data start in 1963). Going forward, single-family starts should improve later this year because inventories of new homes have fallen to levels not seen since 1972 and will require restocking, and because the household formation rate will increase as the economy starts adding jobs.

The second development is the collapse in the market for multi-family homes (i.e., the rental market). This category (down 51.6 percent from a year earlier) is being hit on two fronts. Tight credit and overbuilding are hammering multi-family housing construction, which has nearly ground to a halt. The rental market is also being hurt by falling house prices and the tax credit for first-time homebuyers, which is swaying renters into becoming homeowners. The outlook for this category over the next 12 to 24 months is grim.

The third development is the worsening downturn in private nonresidential construction. Spending in January was weak almost across the board. On top of this, data revisions lowered the estimates for November and December. The outlook for private nonresidential construction over the next two years is grim due to overbuilding, the collapse of the securitization market, tight credit, plunging real estate prices, rising vacancy rates, and rising unemployment.
The fourth development was public construction, which after posting solid gains during the first half of 2009, fell for the sixth straight month in January. Indeed, spending on infrastructure categories has been falling during the past four months, although we expect the stimulus bill to reverse this trend soon.

Might weather have played role in January's poor across-the-board numbers? Probably not. December was the 14th-coldest and 11th-wettest December in the 115-year period of record, according to the National Climatic Data Center. January's weather was close to normal. This weather pattern would tend to suppress activity in December and raise them in January.