By FLOYD NORRIS Published: November 5, 2010
AFTER a rapid plunge, the pace of residential construction in the United States has stabilized. But any respite for the economy that could have been provided by the end of that decline has been more than offset by a drop in privately financed nonresidential construction.
And now even publicly financed construction has begun to slide on a year-over-year basis, something that has not happened since 1984.
The rapid decline in nonresidential construction reflects the fact that commercial projects often cannot be stopped immediately, even if the market has soured. Finishing a building is usually preferable to leaving it half built, since there is no possibility of renting out an unfinished shell. That helped to keep such spending up early in the recession, but it has since fallen off rapidly.
Figures for September, released this week, showed that residential construction spending rose a little compared with August, but remained well below year-ago levels. At the same time, figures for almost every category of nonresidential spending showed declines.
Month-to-month figures can be volatile because of weather, even though the Census Bureau applies seasonal adjustments. The accompanying charts are based on total spending over 12-month periods, and compare one period to the same period a year earlier. The figures are in actual dollars, not adjusted for inflation.
Private residential construction spending took off early in this century, rising to a peak in 2006. For the 12 months through June of that year, Americans spent $643 billion on building homes and apartments. That spending was spurred, of course, by easy credit and by a mortgage industry that was lending money to almost anyone. By early this year, the 12-month total was down to $243 billion, a decline of more than 60 percent.
At the peak, residential spending amounted to 55 percent of total construction spending, a level unprecedented since the government began collecting such data in the 1960s. For many years, nonresidential and residential spending were on different cycles, with one drawing in more money when the other faltered. But that pattern ended in the early 1990s, and residential spending was virtually unaffected by the 2001 recession.
Publicly financed construction, largely for things like roads, schools and sewers, has been relatively steady and did not rise as rapidly during the years when the economy was booming. Now it is sliding, but not as rapidly as the other categories. It is now the largest of the three categories.
During the boom, the excesses in the economy both drove up construction costs and left many areas overbuilt, with too many homes, offices, hotels and stores. It will take time to work off those excesses, which is a why a rapid pickup in such spending seems unlikely.
There is a need for public infrastructure projects, and with contractors desperate for business, there is a possibility of getting such work done for less than it would otherwise cost. But there appears to be little prospect that the government will be able to take advantage of that opportunity.
While federal aid often pays for a large part of projects, a vast majority of public construction projects are undertaken and at least partly financed by state and local governments. Many of them are suffering large budget deficits, in part because falling property prices have depressed tax collections, and are hesitant to undertake projects that can be deferred.
This is an area where a federal stimulus program could both pay for needed projects and put to work a sector of the economy that has otherwise dubious prospects, even if the overall economy does continue to improve. Concern over federal budget deficits, however, may make Congressional approval of such a program impossible.