Construction Spending Decreases on U.S. Government Slump

Construction spending in the U.S. unexpectedly fell in March, reflecting the biggest slump in government projects in 11 years.

Outlays decreased 1.7 percent to a $856.7 billion annual rate, the least since August, the Commerce Department reported today in Washington. The median forecast of 46 economists surveyed by Bloomberg called for a 0.6 percent rise. Public projects dropped by 4.1 percent, the biggest decrease since March 2002.

The plunge in government property procurement swamped a gain in homebuilding in March, and highlights the risk that the automatic across-the-board cuts known as sequestration that started that month represent for the economy. Revised figures also showed construction spending plunged by a record in January, indicating the industry will contribute less to first-quarter GDP when those figures are released at the end of this month.

“State and local governments have been less willing to engage in new construction projects for the last several years since they’ve been recovering from the budgetary stresses of the recession,” said Ryan Wang, an economist at HSBC Securities USA Inc. in New York and the only forecaster in the Bloomberg survey to predict a drop in construction outlays. “Probably public levels of construction will be held steady for this year, but meanwhile we have an ongoing recovery in residential construction.”

Survey Results

Estimates in the Bloomberg survey ranged from a drop of 0.3 percent to a 1.5 percent gain. February’s reading was revised to show a 1.5 percent gain from the initial estimate of a 1.2 percent advance. January now shows a 4 percent drop, the most since records began in 1993.

Revisions showed construction spending climbed 1.5 percent in February, more than previously estimated, and plunged a record 4 percent in January.

Construction spending increased 4.7 percent in the 12 months ended in March before adjusting for seasonal variations.

Private construction spending declined 0.6 percent from the prior month.

In housing, outlays climbed 0.4 percent to a $294.9 billion annualized pace. The gain was led by single-family units, which increased 1.6 percent. Private non-residential projects fell 1.5 percent, led by commercial and healthcare.

Public Outlays

The drop in spending on public construction brought the value down to $258.3 billion, the weakest since October 2006. Federal outlays dropped 1.7 percent and state and local agency spending fell 4.3 percent.

Recent reports show the housing recovery is gaining traction, increasing demand for homebuilders such as Bloomfield Hills, Michigan-based PulteGroup Inc.

“With five quarters of generally improving market conditions in the rearview mirror, I think it’s safe to say that a sustained recovery in demand for housing is indeed underway,” Richard Dugas Jr., PulteGroup’s chief executive officer, said on an April 25 earnings call.

New-home construction climbed to its highest level in almost five years last month. Starts increased 7 percent to a 1.04 million annual rate, the most since June 2008, from a revised 968,000 pace in February.

Home Sales

Sales of new homes rose 1.5 percent to a 417,000 annual pace in March, completing the strongest quarter since 2008.

Existing-home sales dropped in March as a lean supply of properties kept the industry from generating a stronger recovery, according to National Association of Realtors data. Purchases of previously owned homes fell 0.6 percent to a 4.92 million annualized rate. The median price increased 11.8 percent from a year earlier.

More Americans than forecast signed contracts in March to buy previously owned homes, the realtors’ group reported earlier this week. The index of pending home sales increased 1.5 percent after a revised 1 percent decline the prior month.

Today’s report may reduce first-quarter growth estimates when the figures are released later this month. Residential construction rose at a 12.6 percent annualized rate in the first three months of the year, contributing 0.3 percentage point to the quarter’s 2.5 percent pace of growth, Commerce Department figures showed last week.

Spending on commercial structures was little changed, dropping at a 0.3 percent rate.

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