Construction Spending in U.S. Unexpectedly Declined in June

Construction spending in the U.S. unexpectedly dropped in June for the first time in three months, easing off an almost four-year high amid government cutbacks.

Outlays (CNSTTMOM) decreased 0.6 percent to a $883.9 billion annual rate after a 1.3 percent increase in May that was almost three times larger than previously estimated, the Commerce Department reported today in Washington. The median forecast of 49 economists surveyed by Bloomberg called for a 0.4 percent rise. Government outlays slumped to the lowest level since 2006.

A sustained pickup in the housing market combined with gains in non-residential building will be needed to overcome government budget cuts that have restrained growth. Nonetheless, tight land inventories and rising mortgage rates threaten to slow the progress in construction.

“The trend has been relatively positive in recent months,” David Sloan, senior economist at 4Cast Inc. in New York, said before the report. “It’s a fairly important part of the economy. The housing market led the economy into recession, now it seems to be gaining some strength.”

Estimates in the Bloomberg survey ranged from a drop of 0.4 percent to a 1 percent gain. May’s reading was revised up from a previously reported 0.5 percent gain and April was also pushed up to show a 1.1 percent advance rather than the 0.1 percent gain that was on the books.

Another report today showed claims for jobless benefits unexpectedly dropped last week to the lowest level in more than five years, extending swings typical for the month of July. Applications declined by 19,000 to 326,000 in the week ended July 27, the fewest since January 2008, from a revised 345,000 the prior week, the Labor Department reported.

Survey Results

The median forecast of 50 economists surveyed by Bloomberg called for 345,000. A government analyst said no states were estimated, and the data were still being influenced by the auto plant shutdowns that play havoc with the figures at this time of year.

Construction spending climbed 5.1 percent in the 12 months ended in June before adjusting for seasonal variations, according to the Commerce Department figures.

Private housing outlays were little changed in June at a $332.1 billion annualized pace. Private non-residential projects declined 0.9 percent, reflecting decreases in commercial construction and in educational facilities.

The construction industry has been adding jobs, which helps companies including Springfield, Massachusetts-based Northeast Utilities. (NU)

‘Improving’ Economy

“I would characterize the local economy as improving,” Chief Financial Officer James Judge said in a July 30 earnings call. The company provides retail electric service to customers in Connecticut, New Hampshire and part of Massachusetts. “We continued to see signs of improvement, particularly in the local labor and housing markets. Regarding the local labor market, we have seen a notable improvement in construction related labor activity, which increased in all three states.”

Work began on 836,000 houses at an annualized rate in June, a Commerce Department report last month showed, the least since August and down 9.9 percent from a revised 928,000 pace in May. The drop was led by a plunge in multifamily projects, which are more volatile than single-family homes.

Even so, purchases of new U.S. homes climbed 8.3 percent to an annualized pace of 497,000 homes in June, the Commerce Department said, achieving the highest level since May 2008.

Today’s report is the first to play into revisions to second-quarter gross domestic product that will be issued at the end of this month.

Growth Estimates

Gains in construction helped bolster the growth estimates released yesterday. GDP, the value of all goods and services produced, rose at a 1.7 percent annualized rate after a 1.1 percent gain the prior quarter that was smaller than previously estimated, Commerce Department figures showed.

Non-residential outlays climbed at a 6.8 percent annualized rate from April through June, the report showed. Home building increased at a 13.4 percent rate. The unexpected drop in June was offset by bigger gains in May and April than previously reported, signaling the quarterly data may be revised up.

To contact the reporter on this story: Jeanna Smialek in Washington at jsmialek1@bloomberg.net

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

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