Construction Spending at Lowest Level in 8 Months

A persistent housing slump helped push construction spending in June to the lowest level in eight months, the government said Tuesday, but economists are expecting at least a modest rebound as interest rates decline.

The Commerce Department said residential, non-residential and government construction activity fell 0.8% in June to a seasonally adjusted annual rate of $414.7 billion, the lowest level since October. The decline followed a 0.6% gain in May and a 0.8% drop in April.

Construction of new housing units dropped 1.2% to an annual rate of $136.6 billion, the lowest level in three years. It was the fifth consecutive monthly decline.

A yearlong campaign by the Federal Reserve Board to fight inflation with higher interest rates ended this spring. Starting in early June, the central bank reversed course and has eased short-term rates three times, once in June and twice last month.

Long-term rates, over which the Fed has less influence, are also down. Thirty-year, fixed-rate mortgages averaged 9.81% last week, the lowest in two years, according to the Federal Home Loan Mortgage Corp.

Economists expect rates to continue falling gradually and, as a result, construction activity to pick up. But, softness in economic growth overall will prevent a strong surge, they said.

“I don’t see a big rebound. . . . At least in the housing sector, I think we have several more slow months to come while people wait to see whether we’re going to have a recession or not,” said economist James Christian of the U.S. League of Savings Institutions.

“If you can’t sell them, you shouldn’t build them,” he said.

Activity for the first six months of the year was only 2.9% above the same period in 1988, an increase that doesn’t even make up for inflation in construction costs.

The weakness in June included a 4.8% drop in public construction, which accounts for about one-fifth of construction activity, to an annual rate of $80.6 billion. The decline included a 3.6% drop in spending for highways and streets, the biggest government category.

Spending on single-family homes fell 1.3% to an annual rate of $113.6 billion, while multifamily construction was down 0.9% to $23 billion.

Non-residential construction rose 2.8% to a rate of $100.3 billion. That reflected strength in industrial projects, up 4.3%; hotels and motels, up 6.8%; office building, up 1.8%, and other commercial projects such as shopping centers, up 2.5%.

CONSTRUCTION SPENDING

July ‘89: 414.7

Source: Commerce Department