Construction Spending Increase Sparks Hope For Market Recovery

A upbeat November for the construction business may not signal a major recovery for the long-suffering industry.
According to the Associated General Contractors of America, construction spending totaled $807 billion in November — highest level since June 2010. The Associated Press reports that the Commerce Department said spending on construction projects rose 1.2 percent in November — largest jump since a 2.2 percent rise in August.
AP notes:

Construction spending rose 1.2 percent in November to a seasonally adjusted annual rate of $807.1 billion. While that’s barely half the $1.5 trillion that economists consider healthy, home construction has begun a gradual rebound and likely added to the nation’s economic growth in 2011. Spending jumped 9.5 percent on home improvement projects in November. It rose 1.5 percent on single-family home construction and gained 1.3 percent on apartment building.
“While spending on single-family construction still remains extremely depressed, it has now increased for six straight months and looks consistent with other indicators signaling some improvement in the housing market,” said Daniel Silver, an economist with JPMorgan Chase.

Nomura Economics noted that 2011 construction spending will still fail to eclipse 2010: Through November, construction spending has totalled $724 billion — 2.5% less than the year earlier. Private construction spending increased 1% in a month in November.
“The rise in starts and permits, largely concentrated in multifamily housing, should lead to increased spending going forward,” Nomura stated.
Public construction increased at a strong monthly rate of 1.7%, Nomura said, as highway construction rose 1.9% education construction rose 0.5%.
“The November jump in construction spending is by no means a bad sign, but it must be understood in the context of being a historically volatile series – especially from month-to-month when revisions can be significant – and in light of a secular downtrend in construction activity, Nomura said.
Economists at IHS Global Insight choose to subtract residential improvements, “because this category is badly estimated.” Still, minus improvements, spending “was up a solid 1%.”
IHS notes that “recent strong gains in multifamily housing starts point to solid increases in multifamily construction throughout 2012″ but “private nonresidential spending made strong broad-based gains earlier this year—but these gains are petering out. The anecdotal evidence is that much of the first half growth was from companies improving and retrofitting existing facilities, not new projects. Our view is that nonresidential construction will face rough times this year, mainly because of difficulties funding new projects.” Plus, IHs laments: “Spending on infrastructure and on public construction to decline moderately over the course of 2012.”
AGCA’s chief economist, Ken Simonson, adds: “Several segments of construction appear to be climbing out of a hole. The new year should reinforce recent year-over-year gains in apartment, power, manufacturing and private transportation construction. But November’s upturns in single-family homebuilding and public construction may not be sustainable. … Public construction segments face stiff spending cuts in 2012.”