How Long Can Non-Residential Spending Hold-Up?

From the WSJ:

Residential spending fell at a 4.1% rate in November to $336.3 billion, 22.8% lower than November 2007. Despite the credit crunch and worsening economy, nonresidential spending showed surprising resilience, rising 1% during the month to $742.1 billion, up 9.2% from the previous year.

Here is the accompanying chart:



Click for a larger image

Notice that non-residential spending has remained strong as residential spending has dropped. However, note this:

Vacancy rates in office buildings exceed 10 percent in virtually every major city in the country and are rising rapidly, a sign of economic distress that could lead to yet another wave of problems for troubled lenders.

That does not bode well for the coming year.

Construction Spending Drops; Manufacturing Weak

From the WSJ:

U.S. manufacturing activity contracted slightly in May, as exports kept the sector afloat and prices surged, but performed better than many economists had expected.

The Institute for Supply Management said its index of manufacturing activity rose to 49.6 in May from 48.6 in April. It was the fourth consecutive month that the index was below 50; readings below 50 signal a contraction in overall activity.

Even so, the report bolstered other recent data suggesting the economy is stagnant but not collapsing.

A separate report showed construction spending in April dropped by a seasonally adjusted 0.4% from the previous month, to $1.12 billion. Spending on private nonresidential construction, which includes hotels and office buildings, rose 1.6%, partly offsetting the slump in residential construction, which declined 2.3% in April and is down 21% from a year earlier, the Commerce Department said.

In the ISM report, exports continued to increase, extending a five-and-a-half-year trend that is helping offset slowing U.S. demand, and production expanded. New orders rose and imports grew slightly. But high commodity costs pushed prices to a four-year high, and employment and inventories contracted.

"Were it not for the weak dollar," which makes prices of U.S. goods cheaper abroad and stimulates export orders, "I really do believe we'd be looking at far lower readings," said Norbert Ore, a Georgia-Pacific Corp. executive who directs the survey. He noted that 80% of ISM member companies are exporters.

TO place this information in the largest context, go to this article which has a group of charts related to the manufacturing sector.

Let's look at the graphs/charts of these numbers to see what they say:



The general trend since January 2004 is lower. That's the macro-trend that supplies the backdrop. That means the one month increase will have to continue for a few more months before we can say the trend is reversed. Also note this number has been below 50 for four months. That in an of itself is a trend (a negative one) to keep in mind.



As for construction, it has had a negative impact on the economy for the better part of two years now. Notice that the latest numbers -- which show a year over year decline -- are being compared to periods where the number was already negative. That's not good news in the long run.

The fact that most ISM companies are exporters is very eye-opening. It does imply the number is skewed towards positive numbers in the current environment.

Finally -- notice this chart from the WSJ article:



This is the prices part of the ISM report, which has been increasing for some time. That's not good. As the article noted:

Respondents to the ISM survey noted prices are "skyrocketing" and posing "major hurdles." The prices component of the ISM survey jumped to 87 in May from 84.5 in April, and Mr. Ore noted that doesn't yet capture the full impact of rising oil prices.

This chart from the IBD story shows two things. First, it gives us a better read of how the current numbers compare. Secondly, it shows how exports are helping out right now.

Consumers Face Strong Headwinds

Consumer spending accounts for about 70% of overall US economic growth. Therefore, the consumer's health is vitally important to further expansion. However, the consumer is under tremendous pressure right now from a variety of fronts. Consider the following:

Decreasing Job Growth



The chart above has the year over year percentage change in employment growth graphed as a line. Notice it has been dropping since the end of the 1Q2006. Also note the gray lines -- which represent the monthly payroll change -- have been decreasing in size as well, indicating the monthly change in payrolls is decreasing. As a result, the unemployment rate is ticking up (although it is still at solid levels).



Decreasing Home Values



The chart above is the Case-Schiller home price chart. Notice the following:

-- During the last expansion home prices were very stable.

-- Home prices double in the first 6 years of the 2000s.

-- Home prices are now dropping:

That comes on top of the hit homeowners are taking from the drop in housing prices, which fell 7.7 percent in 20 metropolitan areas during November from a year earlier, according to the S&P/Case-Shiller price index.

Inflationary Pressures

Consumers are seeing high price increases:



Above is the year over year percentage change in inflation.

In addition, here are some charts of fuel prices from This Week in Petroleum









A Ton of Debt





Above are two charts. They use the total outstanding household debt number for the Federal Reserve's Flow of Funds and information on GDP and disposable personal income from the Bureau of Economic Analysis.

There is no economic magic line which says, "over this line is a bad amount of total household debt and below this line is good household debt." It's really more of a sliding scale. Notice that the total household debt number has been increasing for thirty years. At some point, that will start to cause problems.

I have no idea how much stress is too much for the consumer. However, the facts above indicate he is under a tremendous amount of stress right now.

-- Job growth is dropping,

-- Home values are dropping,

-- Inflationary pressures are increasing and

-- He has a ton of debt to deal with.

Charts are from Economday

Construction Spending Projected to Drop Next Year

From the WSJ:

In a closely watched report expected to be released today, McGraw-Hill Construction will forecast that spending on commercial and manufacturing buildings, such as offices, warehouses and hotels, will decline 7% next year, in dollar volume, and 10% in the number of square feet of space built. That would be a sharp turnaround from this year, when commercial and manufacturing construction is expected to end the year up 11% in dollar volume.

The McGraw-Hill forecast is based on the company's tracking of construction projects, including the issuance of building-permit data by local governments. That data, known as construction starts, are an indicator of future construction spending and often correlate strongly with actual construction spending.

The strength in the commercial sector until now had been offsetting the decline in the housing market. That appears to be changing, though continued growth in institutional construction, such as universities and hospitals, and road construction will provide somewhat of a balance. The pattern of having one sector up while the others were down "has been a moderating force," says Robert A. Murray, vice president for economic affairs at McGraw-Hill Construction, a unit of McGraw-Hill Cos., a New York-based publisher. (Please see related story.)

This is a very important story. Here's why.

According to the Census Bureau, from August 2006 to August 2007, residential construction spending decreased from $631 billion to $529 billion, or a decrease of $102 billion. Over the same time, nonresidential construction has increased from $555 billion to $637, or $82 billion. Nonresidential construction has increased from 46.79% of total construction spending in August 2006 to 54.54% in August 2007. In other words, nonresidential construction has really helped to limit the negative impact of the declining housing market.

If that total slows down then 2008 could be an incredibly ugly year.

Construction Spending Decreases .4%

Link to the report from the Census Bureau.

Overall construction spending decreased (-.4%) from June 2007 and (-2%) from July 2006.

Residential spending decreased (-1.4%) from June 2007 and (-15.6%) from July 2006.

Non-residential increased .6% from June 2007 and 13.9% from July 2006.

Non-residential construction has increased from 46% of all construction spending in July 2006 to 53% in July 2007.

The bottom line is non-residential construction continues to grow at a rate to absorb residential losses. This is good news for the construction employment sector which is an area that we should be watching for signs of weakness.

Construction Spending Decreaces .3%

From the Census Bureau

In billions, total construction spending dropped .3%, from a seasonally adjusted annual rate of $1,178,436 to $1,175,425. Nonresidential spending increase .1% while residential spending dropped .7%.

On the nonresidential side, the biggest drop occurred in communication construction, which dropped 2.2%. Power construction dropped 1.3% and highway/street construction dropped 1.1%.

It's important to recognize that nonresidential spending has increased from 46% of total construction spending a year ago to 53% last month. This is probably a primary reason why construction employment had not dropped despite the drop in residential construction.

Is Consumer Spending Slowing?

From Dow Jones:

National chain store sales fell 1.1% in the first four weeks of June versus the previous month, according to Redbook Research's latest indicator of national retail sales released Tuesday.

The drop in the index compared with a targeted 0.8% drop.

The Johnson Redbook Index also showed seasonally adjusted sales in the four week period rose 1.6% compared with June 2006 and relative to a 1.9% targeted gain.

Redbook said on an unadjusted basis, sales in the week ended June 30 were up 1.2% from the same week in 2006, after a 1.4% increase the previous week. June is a five-week month on the fiscal calendar, ending Saturday, July 7.

Later in the report there is a comment that warm weather pulled people out to summer activities. Earlier this year, cold weather was the reason given for low retail sales figures.

However, according to the BEA, chained personal consumption expenditure increases for March, April and May were -.1, .2 and .1, respectively.

A slower pace of consumer spending also jibes with today's auto sales figures:

Overall, the total industry sales rate looked to come in at about 16.1 million vehicles, lagging Thomson First Call estimates of about 16.5 million. There was one extra selling day in June 2007 than a year earlier.

"As we look at the results coming in, the performance is capping off a second quarter for the industry that I think can best be described as a bit underperforming," Paul Ballew, GM's top sales analyst, said in a conference call. "We're dealing with the twofold impact of gas prices and the housing correction that is occurring in a couple of key states."

A slowdown in consumer spending also jibes with the chained disposable income figures from the BEA. For March, April and May, disposable income figures increased .3 -.6 and -.1 respectively. These figures bring the low unemployment rate into question as well.

Construction Spending Increases

From CBS MarketWatch:

Spending on U.S. construction projects jumped 0.9% in May, the most since February 2006, boosted by hefty gains in spending on federal and private nonresidential construction projects.

The gain outpaced economists' expectations. Analysts surveyed by MarketWatch were expecting construction spending to rise by just 0.1% in May. See Economic Calendar.
Spending on federal projects climbed by 4.1%, the most since October 2006, the Commerce Department reported.

Private nonresidential construction spending rose by 2.7% in May. Public construction spending, meanwhile, rose by 2.2%.

Once again, however, spending on private residential projects like homes and apartment buildings dropped, reflecting a still-weak housing market. Outlays on private residential projects fell by 0.8% in May, following a decline of 0.4% in April.

Here's a link to the complete report

Some interesting points.

1.) A year ago, nonresidential construction was 44.28% of total construction spending. Now that total is 52.72%. Obviously, this means nonresidential spending is now just as important if not more so than residential spending.

2.) There was an across-the-board increase in all areas of business spending -- hospitals, amusements, water, roads, power, communication, etc.... Some of this is probably due to seasonal factors. It's easier to build things in the summer than the winter.

3.) There's been speculation about how the housing slowdown would impact construction employment. It now appears that the ramping up in business spending has helped to alleviate a slowdown in residential hiring. Total construction employment has decreased slightly, but not precipitously. So long as business continues to spend at current rates, this trend will probably continue.

Construction Spending Increases

From CBS.Marketwatch:

Spending on U.S. construction projects rose 0.1% in April as a jump in private nonresidential construction outlays offset a drop in spending on residential projects.

Spending on private residential construction projects fell by 1.0% for the second consecutive month, the Commerce Department reported. Meanwhile, private nonresidential construction spending climbed by 1.5% in April, the government said.

Construction spending in March was revised to rise upward, by 0.6%, from a previously estimated gain of 0.2%

Here's a link (PDF) to the Census Bureau Report.

A few points.

1.) Nonresidential construction is a little under 52% of total construction spending. So long as nonresidential increases at the same pace residential decreases, overall construction spending will be fine.

2.) Nonresidential construction has increased 12.7% since April 2006, while residential has decreased 14.1%. Because these rates are pretty close to offsetting, I have to wonder if the increase in non-residential construction is absorbing the loss in jobs in the residential construction sector. Overall construction employment has barely dropped in the last year. According to the BLS, it has dropped from 7,699,000 to 7,680,000, or a loss of 19,000. The preceding assumes that nonresidential and residential labor is interchangeable and the nonresidential projects are happening in the same place.

3.) Practically every area of nonresidential spending increased, making the gains pretty broad based.

Circuit City Issues Warning

From the WSJ:

Circuit City Stores Inc. warned that April sales were "substantially below plan" and pulled its financial guidance for the first-half of the year. Shares fell 8% in late trading.

The consumer electronics retailer, which is in the midst of restructuring and faces intense competition in the television market, cited weak sales of large flat-panel and projection-televisions. The company previously anticipated a pretax loss of $40 million to $50 million in the first half of the year.

Circuit City shares closed the regular trading session on the New York Stock Exchange down 2.7% at $17.45. In after-hours trading, the stock was recently at $16, down 8.3%.

I looked for similar announcements from Best Buy and couldn't find any. Therefore, this may be company specific information.

However, it may also be a sign of a broader consumer slowdown. Yesterday the BEA announced that consumer purchases dropped .2% in March after adjusting for inflation. This may be a single data point in time which will rebound in the future.

However, it may not. Therefore, it's important to watch retailers' announcements for clues about future consumer behavior.

Construction Spending Up .2%

From CBS:

Spending on U.S. construction projects rose 0.2% in March, fueled mostly by outlays for private nonresidential projects and offsetting a drop in spending on federal and private residential construction.

Construction spending in February was also revised to rise significantly upward, by 1.5%, from a previously estimated gain of 0.3%, causing some economists to boost their projections for first-quarter economic growth.

Let's look at the numbers:

Total annualized construction spending was $1.187 trillion in March, with private construction spending totaling $900.281 billion.

Private residential construction totaled $569 billion or about 48% of total construction spending and 63% of total private spending. This number was down 1% from February and 14% from March 2006. At the same time, private nonresidential spending is up 2.4% from February and 16.5% from March 2006. However, public nonresidential spending was up .4% from February 2006 and 9.5% from March 2006.

Here's an interesting fact. The total value of private and public nonresidential spending is $609 billion, making it about $50 billion larger than nonresidential. That means these combined sectors could theoretically absorb construction workers displaced in the housing slowdown. That assumes that residential and nonresidential construction projects are occurring in the same location and involve the same skill sets etc...

Construction Spending Up .3%

From the Census Bureau

Residential construction spending dropped 1%; all of the gains came from non-residential spending which increased 1.5%.

Residential spending is down 15% from year ago levels while non-residential spending is up 13.6%.

Non-residential construction has increased from 44% of the construction market in February 2006 to 51% in February 2007. That means so long as non-residential construction increases at more or less the decrease in residential spending, non-residential should be able to take-up the slack in residential spending.

Construction Spending Drops .8%

From Bloomberg:

Construction spending in the U.S. fell by the most in three months in January, pulled lower by the biggest decline in homebuilding since July.

Spending on residential and non-residential projects dropped 0.8 percent after a revised 0.6 percent increase in December, the Commerce Department said today in Washington. The government previously estimated a drop in December spending.

Homebuilders are reluctant to start work on new projects as buyers cancel contracts and inventories of unsold homes swell. A report yesterday showing new-home sales fell by the most in 13 years suggests that construction will continue to falter, weighing on economic growth.

``Residential construction spending has been steadily declining since spring 2006, and we expect this trend to continue,'' Drew Matus, a senior economist at Lehman Brothers Holdings Inc. in New York, said before the report.

Here's a link to the Census report

Residential construction dropped 1.7%. Considering the housing numbers we are seeing right now, this is to be expected. However, nonresidential construction increased .2%. Residential and nonresidential are each roughly 50% of the construction numbers. Lodging increased 3.2% and office construction increased 3.1%. Transportation and communication were also up.

Right now, business construction is helping to lessen the negative impact of the residential decline. The real question is will this trend continue.

Construction Spending Drops .2% in November

I made a mistake with the original post. While October numbers did decrease 1%, today's release was the November number. I apologize for any inconvenience this may have caused.

Total construction spending dropped .2% in November.

Residential spending was a big part of the reason for the drop,, as it decreased 1.63%.

Total public construction increased slightly. Remember the last Congress did not pass a final budget resolution. So this number might get a nice injection of public funds when a final budget resolution is passed. Non-residential construction increased 1.43% Most nonresidential subareas (lodging, commercial, power etc...) saw increased. Remember that nonresidential is slightly more than half the size of residential, so nonresidential will really have to pick-up the pace to absorb the decrease in residential construction.

Residential construction has decreased continually since July. It has dropped 6% since than. Total nonresidential construction has increased 4.46% since July.