Construction Spending Drops in May, but it’s not All Bad News

“Construction spending dropped in May for the second straight month, but there are plenty of bright spots amidst the gloom,” Ken Simonson, chief economist for the Associated General Contractors of America (AGC), said recently. Simonson was commenting on a July 3 report from the Census Bureau that showed the value of construction put-in-place fell at a seasonally adjusted annual rate of 0.4% in May, following a dip of 0.2% in April.

“Private residential construction dropped 0.8%, and private nonresidential spending fell 0.3% for the month, more than offsetting a rise of 0.7% in public construction,” Simonson observed. “But nonresidential construction remained much stronger than a year ago. Private nonresidential construction was down slightly from April to May but up 13% compared to May 2005. Every category was in the plus column year-to-date.”

“For instance, manufacturing spending slipped 1.7% in April but was 33% higher than in May 2005,” Simonson commented. “For the first five months of 2006 combined, manufacturing construction was up 25% compared to the same months of 2005.” The broad commercial category fell 0.8% from April to May but was 10% higher year-to-date, led by a 55% jump in shopping centers and a 17% gain in general commercial warehouses.

Educational spending was up 7.5% in January-May 2006 compared to the same months last year.

“Private nonresidential construction appears to have plenty of momentum for the rest of 2006 and into 2007,” the AGC economist said. “A variety of manufacturing, energy and power, hospital, and retail projects will lead the way. Office construction is picking up in more markets. The soft spots appear to be such retail categories as auto dealers and food and beverage establishments.”

“Public construction is still growing but may slow as more agencies find their budgets will not cover the leap in construction costs,” Simonson warned. “More projects are likely to be canceled or redesigned as costs for paving materials, metals and plastics keep rising at double-digit rates.”

A podcast discussing the latest construction spending trends is available at www.agc.org/podcast .

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