Construction Spending in U.S. Increases More Than Forecast

Construction spending climbed almost three times more than forecast in October, reflecting broad-based gains that signal the industry is poised to make a bigger contribution to economic growth.

The 1.4 percent rise was the biggest since May and followed a 0.5 percent advance in September, the Commerce Department reported today in Washington. The reading exceeded all 45 estimates in a Bloomberg survey of economists, in which the median projection was for a 0.5 percent increase. Home construction jumped to the highest level since November 2008.

Healing in the residential real estate market, boosted by rising property values and record-low borrowing costs, is helping to sustain building projects. Still, the fiscal cliff of tax increases and spending cuts set to take effect next year, absent a deal negotiated by President Barack Obama and Congressional Republicans, may depress non-residential work as government and businesses delay construction.

“We’re seeing fairly dramatic improvements in new housing starts and good general housing construction activity over the last several months, and that has really been propelling the overall construction,” Russell Price, a senior economist at Ameriprise Financial Inc. in Detroit, said before the report. “Construction -- especially residential construction -- is in a very sustainable recovery that should last a few years, absent a misstep in Washington.”

Survey Results

Estimates in the Bloomberg survey ranged from a drop of 0.5 percent to a 1.2 percent increase. September was initially reported as a 0.6 percent advance and the Commerce Department revised the August gain to 1.1 percent from a previously reported 0.1 percent drop.

The value of all projects rose to $872.1 billion, the most since September 2009.

The Commerce Department said superstorm Sandy had “minimal” effect on the October data because it occurred so late in the month. The agency said it couldn’t quantify any impact.

Construction spending increased 9.3 percent in the 12 months ended in October before adjustments for seasonal variations, today’s report showed.

Private construction spending climbed 1.6 percent from the prior month.

Homebuilding outlays increased 3 percent to $294.2 billion. Private non-residential projects rose by 0.3 percent.

Public Projects

Spending on public projects increased 0.8 percent from the prior month. Federal construction jumped 10.7 percent, the biggest gain since September 2010. State and local agency projects fell 0.1 percent from the prior month.

The residential real estate market has shown signs of further healing. Property values are picking up, with the S&P/Case-Shiller index of home prices in 20 cities showing home prices rose in the year ended in September by the most since July 2010, according to a Nov. 27 report.

Sales of previously owned U.S. homes increased 2.1 percent to a 4.79 million annual rate in October, exceeding the median forecast of economists surveyed by Bloomberg, according to data from the Realtors’ group on Nov. 19.

Still, new-home sales, logged when contracts are signed, dropped 0.3 percent to a 368,000 annual pace last month following a revised 369,000 rate in September that was weaker than initially reported, the Commerce Department said Nov. 28.

Mortgage Rates

Cheaper borrowing costs continue to lure buyers who are able to meet strict lending standards. The average rate on a 30-year, fixed mortgage was at 3.32 percent in the week ended Nov. 29, near the record-low 3.31 percent from the prior period, according to McLean, Virginia-based Freddie Mac.

American Woodmark Corp., a Winchester, Virginia-based home furnishing and remodeling company, is among businesses still concerned about the housing outlook.

“Recent trends suggest to us that housing has finally begun to emerge from its long, multi-year downturn,” Chief Financial Officer Jonathan Wolk said on a Nov. 20 earnings call. “However, consumer confidence and macroeconomic conditions remain uncertain and difficult to predict and many consumers remain unwilling or unable to make large-ticket purchases.”

Federal Reserve Chairman Ben S. Bernanke said the central bank will take action to speed growth and spur a rebound in a housing market facing obstacles such as too-tight lending rules.

“We will continue to use the policy tools that we have to help support economic recovery,” Bernanke said in a Nov. 15 speech in Atlanta.

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