Economist analyzes nonresidential construction spending

ARLINGTON, VA. — Surprising construction data masks declining conditions in the construction sector and nonresidential spending could fall by up to 9% during the coming months, said Ken Simonson, chief economist for the Associated General Contractors of America when he issued an analysis of data from the Census Bureau on nonresidential construction spending.

His analysis included the following statements:

The increase in nonresidential construction spending for March reported by the Census Bureau is a reminder that construction is often a lagging indicator of economic activity. Increases in manufacturing construction are being propelled by huge refinery and steel-mill projects that were begun well before the economic downturn. These large projects are eclipsing broader negative trends. However, as they are completed or scaled back in the coming months, we will get a fuller picture of how much nonresidential construction is being adversely affected.

Given declining office and hotel vacancy rates, continued difficult retail conditions and ongoing challenges with the credit markets, it is hard to imagine many new offices, hotel or retail projects starting anytime soon. And, unfortunately, even where there may be demand, financing these projects right now is, at best, difficult. In short, despite today’s data, nonresidential construction activity is likely to decline significantly over the coming months.

Meanwhile, stimulus money has not yet turned into construction put in place — the concept measured by the Census Bureau. Although thousands of projects have been announced, they are not likely to show up as construction spending until May data is released in early July.

Indeed, the March numbers show that federal construction spending slipped 1.7% from February. While state and local spending rose 1.3%, the highway and street component — where the earliest stimulus money is likely to appear — dipped 0.7%.

In coming months, stimulus money will flow in increasing amounts. But it is not likely to overcome the downturn in private, state and locally funded projects. Given the broader economic trends at play, it is likely that nonresidential spending could fall by as much as 9% in 2009, even with stimulus funds.