Update on U.S. construction spending report

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Bloomberg Business Week reports construction spending in the U.S. unexpectedly increased in March, propelled by gains in state and local government projects.

The 0.2 percent increase brought spending to $847.3 billion, and followed a revised 2.1 percent drop in February that was larger than previously estimated, according to Commerce Department figures released May 3 The value of private projects dropped to the lowest level in 11 years.

Federal government stimulus funds may be trickling down to the state and local level, promoting construction of power plants, transportation systems and hospitals. Other areas of the economy are struggling as high building vacancies and low plant use mean spending on commercial projects will continue to be depressed in coming months.

The increase is “definitely your stimulus dollars at work,” said Sam Bullard, an economist at Wells Fargo Securities LLC in Charlotte. “Non-residential, given the pressures especially on the commercial side, is going to continue to be a pressure on construction.”

Another Commerce Department report showed construction spending decreased 12 percent in the 12 months ended in March.

Private construction spending dropped 0.9 percent to $550.8 billion, the lowest level since January 1999. Homebuilding outlays dropped 1.1 percent and non-residential projects decreased 0.7 percent, led by declines among communications plants and office buildings.

Public spending increased 2.3 percent from a month earlier as state and local governments boosted outlays by 2.5 percent, the most since March 2009. Federal construction advanced 0.3 percent after jumping 2.9 percent in February.

Construction Slump

A slowdown in construction was one drag in the first quarter. The world’s largest economy grew at a 3.2 percent pace in the first three months of the year, the Commerce Department reported last week. Commercial construction dropped at a 14 percent pace, while home building dropped for the first time in three quarters, falling at an 11 percent rate.

Residential construction may show improvement this quarter as milder weather in March. Housing starts rose for a second straight month in March and building permits, a sign of future building, jumped to the highest level in more than a year.

Challenging’ Conditions

“Market conditions in the homebuilding industry are still challenging, with rising foreclosures, significant existing home inventory levels, high unemployment, tight mortgage lending standards, the expiration of certain government support for the housing and mortgage markets and weak consumer confidence,” Chief Executive Officer Donald Horton said in a statement. “However, new home inventory remains low, interest rates are favorable and housing affordability is near record highs.”

Commercial real estate faces more headwinds as vacancy rates remain high and factories have excess capacity.

Click Here to view the entire Bloomberg BusinessWeek report.

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