Construction Spending Edges 0.1% Higher : Factory Building Offsets June Declines in Housing

Construction spending inched up 0.1% in June as a big increase in investment for new factories helped offset declines in housing and government projects, the Commerce Department said Monday.

Building activity rose to a seasonally adjusted, but not inflation-adjusted, annual rate of $402.8 billion in June, following a 0.8% increase in May.

Construction spending for the first half of 1988 was only 1.3% above the January-June period of 1987, lagging behind the 2.0% rate of inflation in construction costs between the two periods.

Analysts had been expecting even greater weakness, predicting office and hotel construction would decline in response to high vacancy rates. But projects are getting built anyway.

“What is happening is . . . there is a lot of money available, from here and overseas,” said economist Michael Sumichrast, who heads a consulting firm in Washington.

More New Equipment

Different aspects of the same phenomenon are fueling both the increase in factory investment, which rose 5.7% in June and stands 21% higher than it was a year ago, and the growing availability of money for other construction projects.

U.S. manufacturers are spending more on new equipment and building projects to meet higher demand for U.S. goods overseas. They’re finally benefiting from the fall in the value of the dollar between early 1985 and the end of 1987, which made American goods cheaper on foreign markets.

However, although the trade deficit is not as bad as it was, foreigners still collect more dollars than they need to buy American goods and thus look for ways to invest that money.

The Japanese, particularly, prefer to invest surplus dollars in government securities and real estate, rather than in other investments such as corporate stock.

“There’s one good (real estate) deal for every 50 that you bring to the table, but the money has to be put someplace. . . . I’m afraid we’re going to continue to build in some areas where we shouldn’t really build,” Sumichrast said.

For the rest of the year, analysts are expecting a continued softening of construction activity, led by weakness in housing, which is being hurt by an upward creep in mortgage interest rates.

Dampen Boom

Residential construction fell 0.9% in June to an annual rate of $188.1 billion, the third decline in a row. A 0.7% drop in construction of single-family homes more than offset a 2.3% increase in apartment construction.

John Savacool, an economist with the Wefa Group in Bala Cynwyd, Pa., said factory construction will likely strengthen and residential building wane through the rest of this year.