Construction Spending Down

Overall spending on construction declined 0.9% in May from April to a seasonally adjusted annual rate of $965.0 billion. On a year-over-year basis spending is down 11.6%. This means that there has been no real change in the rate of contraction in spending.

On a year-to-date basis, spending is down 11.7%. Private construction was once again the culprit as public spending (stimulus?) was up by 0.6%. Private construction spending was down 1.0% for the month and is off 17.4% on a year over year basis.

Surprisingly, within public spending, educational construction was up 0.5% and highway spending was down 1.3%. Within private spending, the decline was all due to the residential side, which was down 3.4% for the month and is off 33.9% year over year. Non-residential construction actually inched up 0.5% and is off just 3.3% on a year over year basis. The graph below (from http://www.calculatedriskblog.com/) shows that non-residential construction spending now substantially exceeds residential construction.

The year-over-year numbers on private non-residential construction contain some very big surprises. As one might expect, construction of Hotels (-17.3%), Offices (-18.2%) and Stores (-30.0%) has fallen quite sharply. However, construction of manufacturing facilities is booming, up 55.6% on a year over year basis. Honestly, this makes no sense to me given the record low capacity utilization rates.

For the month, spending on manufacturing rose by 4.3%. The power (i.e. Utilities) sector has also been offsetting some of the declines elsewhere, rising 3.8% on the month and up 12.0% on a year-over-year basis. Private spending on educational and health care buildings is off slightly on a year-over-year basis, down 1.6% and 0.6% respectively.

Residential construction is particularly important since historically it has been one of the prime forces in pulling the economy out of recessions. Non-residential construction spending on the other hand tends to lag the overall economy. With residential construction spending still falling fast, this recovery is not going to be very exciting when it eventually gets here.

I would expect that non-residential spending will start to decline much more significantly in the months ahead. It will take a long time for the slowdown in lodging, office and retail construction to really put much of a dent in the current oversupply of space available.  This means that rents will get cheaper over time.

That is good news for tenants, but bad news for the big REITS like Simon Property Group (SPG - Analyst Report), Vornado Realty Trust (VNO - Analyst Report), Boston Property Group (BXP - Analyst Report) and Host Hotels (HST - Snapshot Report). The tenants group is far too diffuse to pick out a specific play on the upside, but over time could help the bottom line of countless companies.