May 3 2007 4:57AM | Permalink | Email this | Comments (1) |
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The $14.1 Billion upward revision to February construction spending by the Census Bureau is not the good news that it first appears to be. That‘s because 75% of the huge revisions was in residential remodeling. This may be good news for specialty residential subcontractors — but even this is not certain.

$3.6 billion of the higher spending estimates was the net of the typical plus and minus monthly corrections to other construction sectors. It is welcome news that the balance was a plus but none of the individual changes were significant. An upward revision was expected after the initial February report showed very meager growth from January.

The residential remodeling spending estimates are not made the same way as all other construction segments. The monthly estimates for every other construction market are derived from a carefully drawn sample of projects. The owner or contractor on these projects is contacted and asked to provide detailed estimates of job site construction spending during the month. Once selected, projects are tracked for many months.

But for residential remodeling, the source of the estimate is a survey of consumers done to capture the household spending mix to calculate weights for the Consumer Price Index. Substantial revisions are common for the residential remodeling estimates. The latest one is not out of line with a long string of huge revisions.

That said, the higher estimate for remodeling spending may be real. The fundamentals for the remodeling market are reasonably good and still improving. Residential specialists that no longer have a full schedule building new homes are pursuing remodeling work after ignoring it for several years. The revision may have corrected a previous underestimate. Suppose that the new estimated spending level holds when future estimates are released. Then this is good news for this part of the construction market. But, note that already the March estimate is down 3.5%, more than $6 billion from February. Also the revision puts February project work 12.5%, seasonally adjusted, above January. That is nearly $21 billion.

These month-to-month changes in aggregate activity are not plausible in a market with several hundred thousand suppliers, mostly working on multiple small projects. The ugly truth is that we are unable to make reliable monthly estimates of residential remodeling spending.

But even if this is a "good" revision, this does not change the market environment for materials suppliers because residential remodeling contracts are primarily labor with relatively few materials involved in many jobs.