July construction spending slips

September 1, 2009 11:10:40 AM PDT
Construction spending edged down in July as weakness in nonresidential building and government projects offset the best showing for home building in 10 months. The Commerce Department said Tuesday that construction spending dipped 0.2 percent in July, worse than the flat reading that economists had expected. The drop followed a 0.1 percent rise in June.

The July decline occurred even though construction of homes and apartments rose 2.3 percent. It was the best showing since last September, but residential construction is still 27.8 percent below the year-ago level.

However, the increase was further evidence that the beleaguered housing sector could be staging a comeback after a severe collapse which helped push the country into the longest recession since World War II.

The problems in construction are not confined to housing. Developers of other projects from shopping centers to office buildings are facing troubles as banks tighten lending standards in the face of rising loan defaults in commercial real estate.

In July, nonresidential construction fell 1.2 percent, the third straight monthly decline. A big fall in spending on hotels and motels, along with drops in office construction and spending on shopping centers, led the overall decline.

Spending on government construction projects dropped 0.7 percent, the first decline since a 1.7 percent fall in January. The setback was a surprise to some economists who had expected government works spending to keep increasing because of support from the $787 billion economic stimulus bill approved by Congress in February.

But Paul Dales, chief U.S. economist for Capital Economics, said it takes time for much of the stimulus money earmarked for highways, bridges and other public works projects to get through the approval pipeline.

"These things are not instant and there is a lot of bureaucracy to get through," he said.

Federal construction activity rose 0.8 percent, but state and local construction spending fell 0.8 percent in July.

Even when the stimulus money does translate into more government projects, Dales said he expects only a modest positive impact on state and local spending, given the severe budget problems facing many states because of a sharp fall in tax revenues amid the recession.

Ken Simonson, chief economist for the Associated General Contractors, said $135 billion of the $787 billion stimulus package would likely end up being used for various construction projects. He expected about $30 billion to $40 billion of that amount to be spent this year.

"We know from contractors' reports that stimulus money is beginning to flow, but what should be a torrent by now is only a trickle in most categories," he said.

The construction industry has been one of the hardest-hit sectors in the current recession, a downturn that occurred after a five-year boom in housing came to an end. However, in July, sales of existing homes rose 7.2 percent, the largest increase in at least 10 years. Sales of new homes also rose 9.6 percent to the strongest sales pace since last September.

The National Association of Realtors said Tuesday its seasonally adjusted index of sales contracts signed in July for previously occupied homes rose 3.2 percent to 97.6. It was the sixth straight increase, and 12 percent higher the same month last year. Economists surveyed by Thomson Reuters had expected the index to edge up to only 96.5.

Home sales have been helped by a government program that is giving first-time home buyers a tax credit of 10 percent of the purchase price of the home up to $8,000. That program is due to expire Nov. 30 but builders and real estate agents are pressing Congress to extend the tax credit, warning that if the program is not extended sales could slump again.

Luxury homebuilder Toll Brothers Inc. reported in August that it had seen the first annual increase in home purchase contracts in four years in its just completed third quarter and that the current quarter began with 26 percent more buyers putting down deposits for homes than a year ago.

DR Horton Inc., another big homebuilder, reported last month that it had posted a narrower quarterly loss than the previous year. DR Horton said it expected to have a better performance in 2010 than in 2009 although it said builders were still facing a tough environment with record home foreclosures, rising unemployment and tighter mortgage lending requirements.

Construction spending totaled $958 billion in July at a seasonally adjusted annual rate, the lowest level since February 2004.

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