Tuesday, July 01, 2008

Construction Spending: May 2008

Today, the U.S. Census Bureau released their May read of construction spending again demonstrating the significant extent to which private residential construction is contracting particularly for single family structures while non-residential spending continued to grow essentially in-line with its recent expansion.

An important note, with this release the Census Bureau revised both the total private residential and private single family component series to EXCLUDE “expenditures on private residential improvements to rental, vacant, and seasonal properties” an adjustment that has significantly change the slope of the recent pullback.

In order to get a sense of the significance of the revisions, I have isolated the delta (pre – post revision) in the chart below which appears to indicate that spending on improvements to rental, vacant and seasonal properties actually boomed during 2007 but has begun to erode a bit in 2008.

It’s likely that expenditures on vacant and rental properties increased in 2007 simply as a result of the stock of vacant and rental properties increasing significantly.

With the tremendous weakening trend continuing, total residential construction spending fell 27.27% as compared to May 2007 and 43.99% from the peak set in March 2006.

Worse off though was private single family residential construction spending which declined 39.21% as compared to May 2007 and a truly grotesque 57.53% from the peak set in February 2006.

Non-residential construction spending, currently accounting for just under half of all private construction spending, remains the only pillar of strength gaining 16.61% as compared to May 2007.

As was noted in prior posts, commercial real estate (CRE) appears to be coming under some pressure with increasing vacancy rates and falling prices.

Keep your eye on the last chart in the months to come for a clear indication of a pullback.

The following charts (click for larger versions) show private residential construction spending, private residential single family construction spending and private non-residential construction spending broken out and plotted since 1993 along with the year-over-year and peak percent change to each since 1994 and 2000 – 2005.