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Construction Spending in U.S. Unexpectedly Fell to Decade Low

Construction spending in the U.S. unexpectedly fell in December to the lowest level in a decade, signaling the industry will continue to lag behind the economic recovery.

The 2.5 percent drop was the biggest since July and brought the value of all projects down to a $787.9 billion annual rate, the lowest since July 2000, Commerce Department figures showed today in Washington. The median estimate of economists in a Bloomberg survey called for a 0.1 percent gain.

Mounting foreclosures and an unemployment rate that will average more than 9 percent in 2011 indicate homebuilding may take time to rebound. Non-residential projects also will slow as budget-constrained state and local governments restrict funding for public works such as highways.

“Housing will remain lackluster for at least another year,” Harm Bandholz, chief U.S. economist at UniCredit Group in New York, said before the report. “The imbalances aren’t fully corrected yet.”

The median forecast was based on a survey of 50 economists. Estimates ranged from a drop of 1.3 percent to an increase of 0.5 percent. The Commerce Department revised the November reading down to a 0.2 percent drop from a previously estimated gain of 0.4 percent.

Construction spending decreased 10 percent in 2010, after dropping 15 percent the prior year. A total of $814.2 billion was spent last year, the least since 2000.

Homebuilding Drops

Private construction spending fell 2.2 percent in December from the prior month, the most since August. Homebuilding outlays decreased 4.1 percent, while private non-residential projects dropped 0.5 percent, led by hotels and motels.

Spending on public construction fell 2.8 percent, the most since January. Federal construction spending dropped 12 percent, the biggest decrease since October 2004.

The unexpected drop in construction will cut into fourth- quarter growth when revisions are issued later this month. The world’s largest economy grew at a 3.2 percent annual rate from October through December, the Commerce Department said last week.

Weather may have played a role in the slump. December was the seventh snowiest such month in a century’s worth of records for the contiguous U.S., based on satellite observations, according to the National Climatic Data Center. About 55 percent of the country had snow by Dec. 27th. It was the third wettest December on record in the West.

A full rebound in homebuilding will take years, as demand is yet to show sustained gains. For all of 2010, new-home sales fell 14 percent nationally from the prior year to 321,000, the fewest in data going back to 1963, a Commerce Department report showed.

Distressed Properties

Foreclosure filings increased in almost three-quarters of U.S. cities last year as unemployment caused homeowners to default and mortgage distress spread to new regions, according to RealtyTrac Inc. States where the crisis began -- California, Florida, Nevada and Arizona -- accounted for 19 of the 20 cities with the highest foreclosure rates.

The glut of distressed properties, which depresses prices, is among factors prompting builders to pull back. Housing starts in December fell to the slowest annual rate since October 2009, according to Commerce Department data.

D.R. Horton Inc., the second-largest U.S. homebuilder by stock-market value, last week reported a fiscal first-quarter loss that was wider than analysts expected as revenue dropped from a year earlier.

“I think 2011 will be a marginal weak year in the homebuilding industry,” Chief Executive Officer Donald Tomnitz said during a conference call on Jan. 27. “Our goal is still to be profitable in 2011 and we’re going to struggle more in ‘11 than we did in ‘10 to be profitable.”

Government agencies are under pressure to cut spending. States are projecting $125 billion of budget deficits in fiscal 2012 and will lose most federal stimulus funds this year, the Washington-based Center on Budget and Policy Priorities said in a Jan. 21 report.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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