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Construction Spending in U.S. Rose 0.4% on Home Improvement

Construction spending in the U.S. rose in April for a second straight month as home-improvement expenditures increased along with construction of schools and power plants.

The 0.4 percent gain followed a revised 0.1 percent increase in March that was smaller than previously estimated, Commerce Department figures showed today in Washington. The median estimate of economists in a Bloomberg survey projected a 0.3 percent increase.

The prospect of more foreclosures pushing down housing prices further and unemployment at 9 percent mean new housing construction will remain depressed while homeowners upgrade their current residences. With the economy slowing and state and local governments seeking to reduce spending, a recovery in non-residential construction may take time to develop.

“We’re looking for some recovery from the very weak numbers at the start of the year,” Jim O’Sullivan, chief economist at MF Global Inc. in New York, said before the report. “The trend in construction is flat.”

Increase Forecast

Economists forecast construction would rise after a previously estimated gain of 1.4 percent in March, according to the median of 51 projections in a Bloomberg News survey. Estimates ranged from an increase of 1 percent to a drop of 1.5 percent.

Construction spending decreased 9.3 percent in the 12 months ended in April.

Private construction spending rose 1.7 percent in April from the prior month. Homebuilding outlays increased 3.1 percent, led by a 7.6 percent jump in home improvement, according to calculations by Bloomberg. Construction of both single-family and multifamily units fell.

“The housing market is still bouncing along the bottom,” John Canally, an investment strategist at LPL Financial Corp. in Boston, said before the report. “There’s still a big overhang of inventory, and with that it’s hard to build new product.”

Private non-residential projects increased 0.5 percent, led by a 3.2 percent increase in power plants and gains in education and health-care facilities.

Some companies, including Caterpillar Inc., the largest maker of earthmoving equipment, are expanding capacity. Caterpillar is seeking to meet rising demand from China and other countries as well as in North America, where mining activity is ramping up.

Substantial Investment

“We are investing in capacity increases around the world to be prepared for 2012 and beyond, including substantial investment in the United States,” spokesman Mike DeWalt said on an April 29 conference call. “More than half of the $3 billion that we expect to spend on capital expenditures in 2011 is being invested in the United States.”

Builders are reluctant to add office space as prices fall. U.S. commercial property prices fell to a post-recession low in March as sales of financially distressed assets weighed on the market, according to Moody’s Investors Service.

The Moody’s/REAL Commercial Property Price Index dropped 4.2 percent from February and is now 47 percent below the peak of October 2007, Moody’s said in a statement May 23.

Work began on 523,000 houses in April at an annual pace, down 11 percent from the prior month, as tornadoes and floods in the South shut down construction sites, the Commerce Department reported last month.

Builders project demand will remain subdued into next year, Jeffrey Mezger, CEO of Los Angeles-based KB Home, told a housing conference in New York on May 11.

Any housing recovery will “be slower than in the past,” Mezger said, adding that he expected sales to “bump along for the next 18 months.”

Home Prices

Home prices in 20 U.S. cities dropped in March to the lowest level since 2003, showing housing remains mired in a slump almost two years into the economic recovery.

The S&P/Case-Shiller index of property values in 20 cities fell 3.6 percent from March 2010, the biggest year-over-year decline since November 2009, the group said yesterday in New York.

Spending on public construction fell 1.9 percent from the prior month as state and local government projects declined. Federal construction spending fell 2 percent.

“The housing sector remained distressed, with house prices flat to down and a large overhang of vacant properties restraining new construction,” Federal Reserve policy makers said in minutes of their April policy meeting released May 18. “Business outlays for nonresidential construction remained extremely weak in February, restrained by high vacancy rates, low prices for office and commercial properties, and tight credit conditions for commercial real estate lending.”

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