Construction Spending Up 2.2% in Month : November Gain Largest Jump Since February

Construction spending shot up 2.2% in November, the biggest increase in nine months, as the building industry benefited from widespread gains in both residential and non-residential construction, the government said Monday.

The Commerce Department reported that spending on new construction rose to a seasonally adjusted annual rate of $419.5 billion in November, an increase of $8.9 billion from the October rate.

It was the biggest one-month gain since a 4.4% rise last February. Construction spending had fallen 0.1% in October after posting a 2% September advance.

Tax Law Hurt in ’87

Analysts credited part of the sharp rebound in November to unusually warm weather in many states, but they said the advance may also be signaling better days for at least part of the construction industry.

“The good increase in non-residential construction is probably a sign that we have seen the worst of the tax-law induced cutbacks in that area,” said David Wyss, an economist with Data Resources Inc. of Lexington, Mass.

Construction spending was depressed in 1987 because of the adverse effects of the new tax law, which reduced many incentives for investing in real estate. The tax changes, coupled with widespread overbuilding in the apartment and office sectors, led to sharp drops in activity in these areas in 1987.

While construction spending overall has risen by 2.9% in the first 11 months of 1987, it was down 18% in the apartment sector and 11% in the office sector.

Michael Sumichrast, an economist and publisher of the Commercial Real Estate Report, said that office building would decline another 20% in 1988 and that this weakness would help to drag overall non-residential construction down by close to 5%.

But Sumichrast said several categories, including factories, hospitals, private schools and public works projects, will actually show increases for the year, based on his surveys.