November 3, 2010
Construction Spending In U.S. Unexpectedly Rose In September

Construction spending in the U.S. unexpectedly rose in September, led by increases in homebuilding and public projects.

The 0.5 percent gain brought spending to $801.7 billion after a revised 0.2 percent drop in August that was previously reported as a 0.4 percent gain, Commerce Department figures showed today in Washington.

Homebuilders are recovering from a slump in demand following the expiration of a government tax break and still face the challenge of mounting foreclosures that are adding to the housing inventory. While rising profits may help corporate spending on structures grow next year, government construction outlays may slow as federal stimulus funds fade and state and local municipalities cut budgets.

“Construction is still a very low- to no-growth scenario for the next nine months at least,” Russell Price, a senior economist at Ameriprise Financial Inc. in Detroit, said before the report. “There’s still a lot of capacity out there to be absorbed. We’ve already been seeing some hit to infrastructure spending from budget cuts on the state and local governments especially as the federal stimulus eases.”

Economists forecast construction spending would decrease 0.5 percent, according to the median projection in a Bloomberg News survey. The 50 estimates ranged from a drop of 1.2 percent to a 0.5 percent increase.

Other figures from the Commerce Department today showed consumer spending rose less than forecast in September as incomes dropped for the first time in more than a year, a sign Americans may keep rebuilding savings and paring debt as the economy is slow to recover.

Spending Slowdown

Purchases advanced 0.2 percent, the smallest gain of the third quarter. Incomes fell 0.1 percent, the first drop since July 2009, and the Federal Reserve’s preferred measure of inflation stagnated, capping the smallest 12-month increase in nine years.

Construction spending was down 10 percent in the year ended in September, today’s report showed.

Private construction spending was unchanged. A 1.8 percent increase in homebuilding was offset by a 1.6 percent drop in commercial projects as fewer factories were put up. Non- residential construction decreased to the lowest level since January 2005.

Public construction climbed 1.3 percent following a 2.2 percent gain in August. Federal construction outlays increased 6.1 percent, while state and local government spending rose 0.8 percent. New transportation grids and schools accounted for most of the gains.

Federal Spending

The Obama administration has been boosting U.S. investment in rail projects. High-speed rail projects in 23 U.S. states will share $2.4 billion in federal aid, Transportation Secretary Ray LaHood said Oct. 28. That is in addition to $8 billion in stimulus money already awarded for passenger train service.

State and local spending may continue to be restrained as municipalities cut projects to balance budgets when tax revenue remains limited.

Newark, New Jersey’s city council Oct. 28 passed a $605 million budget that closed an $83 million deficit by raising property taxes 16 percent and cutting as many as 866 jobs.

“Every city is doing terrible and Draconian things to balance their budgets this year,” Councilman Ronald Rice said in a telephone interview.

Home Sales

Home sales are stabilizing at low levels after a plunge in demand following the end of the homebuyers tax credit, which required contracts be signed by April 30 and closed by Sept. 30. Purchases of new homes increased to a 307,000 pace in September, the Commerce Department said last week.

Housing starts unexpectedly increased in September though building permits were the lowest in more than year and less than starts, figures from the Commerce Department showed last month. That is a signal residential building will remain near record lows in coming months.

“It is difficult to predict when buyer confidence will return and the market will strengthen, but we are optimistic that we’ll see some improvement in 2011,” Meritage Homes Corp. Chief Executive Officer Steven Hilton said in a statement Oct. 27.

The Scottsdale, Arizona-based homebuilder took orders for 706 homes in the third quarter, down 36 percent from a year earlier. The company attributed some of the decline to having closed some communities over the last year.

The economy is a central issue in tomorrow’s mid-term Congressional elections. There is no clear consensus on which party deserves more blame for the economy’s problems, or how best to fix them, according to a Bloomberg National Poll conducted Oct. 24-26. It showed Republicans are poised to retake the U.S. House without a mandate from voters to carry out their policies.

Source: Bloomberg, November 1, 2010

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