Good News, Bad News on Construction Spending

It feels like any good news lately for the U.S. economy lately is accompanied by bad news, and the latest report on the construction industry is no exception: Construction spending in June unexpectedly rose 0.1%, boosted by the federal government's fiscal stimulus, the Commerce Department reported. However, the May construction spending total was revised to a 1% decline, considerably worse than the initially announced 0.2% dip.

The consensus prediction of economists surveyed by Bloomberg had been that June construction spending would fall 0.5%. Construction spending rose 2.3% and 1% in April and March, respectively.

On a year-over-year basis, construction spending totaled a seasonally-adjusted annual rate of $907.6 billion, or down 7.9% from June 2009. However, that's a slight improvement from the 8% year-over-year decline recorded in May.

Federal Stimulus Boosts Utilities, Health Care Projects

In June, public construction spending, which includes fiscal stimulus infrastructure projects, jumped 1.5% to a seasonally-adjusted annual rate of $308.4 billion. In that category, power and utilities construction surged 25.2%, health care building-related construction jumped 5.4%, public office construction increased 3.1%, and highway construction rose 0.1%.

However, the June news wasn't as good in the private construction segment. Private residential construction, which includes single-family homes, fell 0.8% to an annual rate of $258.3 billion. Also, private nonresidential construction, which includes shopping malls and office buildings, declined 0.5% to an annual rate of $269.3 billion.

The Commerce Department's construction spending report provides the most comprehensive survey of both public sector and private sector building activity, and June's release confirms what earlier reports on housing construction have indicated. Private residential construction has slowed due to weak sales of new homes, and the large inventory of both new and existing homes on the market. Commercial construction also remains subdued, in part due to excess development, and in part due to inadequate credit availability to finance new projects. But overall construction activity would be considerably lower were it not for government stimulus spending for public construction projects.

The latest construction report also provides a classic example of why investors shouldn't give too much credence to an initially announced economic statistic: The later revisions can be substantial, as the downward revision to a 1% decline in May's construction spending demonstrates.