Good News Buried in Construction Spending Report
Nonresidential construction spending rose an impressive 1.3 percent in March and 12 percent compared to March 2007, according to the March construction spending figures released by the Census Bureau on May 1. The housing slump buried this news by dragging total spending down by 1.1 percent for the month and 3.4 percent for the year. Yet nearly every category of nonresidential spending continued to exceed year-ago levels. In addition, estimates for nonresidential spending in January and February were each revised up.

Surprisingly, lodging construction continues to boom, with gains of 5.1 percent in March and 40 percent from a year ago. Office, too, is still growing, by 1.4 percent and 14 percent. The standout this month was communication construction, up 13 percent and 20 percent. Commercial (retail, warehouse and farm) construction has faded, however – as expected – with a 1.0 percent decline for the month and a meager 1.0 percent gain compared to March 2007.

Both private and public nonresidential construction are still growing, although public spending is losing speed. Private nonresidential spending was up 15 percent from March 2007, whereas public spending grew 7.2 percent.

I expect a further slowdown in public spending as revenues flatten out or even shrink for highways, schools and other public projects. On the private side, I expect ongoing vigor in spending on power, energy, communications, hospital, higher education and military base realignment-related projects to offset a likely retreat by office and retail construction.

The biggest challenge for all nonresidential construction is runaway materials costs. Yesterday, a steel supplier told customers the price of rebar was rising another $100 overnight, compounding increases of 40 to 70 percent earlier this year. The retail price of diesel fuel is now almost 50 percent higher than a year ago. Copper is close to its all-time high set in May 2006, and near-record prices for oil and natural gas may push up asphalt and plastics prices.

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