Building sector roof is sagging

WASHINGTON — Confirming for many that the economy will get worse before it gets better, construction spending in January recorded its sharpest decline in 14 years while a closely watched indicator of manufacturing activity dropped last month to its lowest level in five years.

The Commerce Department reported Monday that spending on residential and nonresidential construction projects declined 1.7% in January from December on a seasonally adjusted basis. Spending was down 3.3% from a year earlier. The downturn affected commercial and government projects as well as housing.

Until January, spending on nonresidential construction had been strong enough to compensate for a rapid decline in home building, keeping the construction sector roughly flat for the last year.

But a decline in the availability of commercial loans combined with slowing demand throughout the economy has widened the hit to the construction industry, economists said.

“What has been going on in the residential sector is now leaking through to the commercial real estate market,” said Peter Kretzmer, senior economist at Bank of America Corp. “That’s the beginning of a trend that’s going to be fairly sharp.”

The Institute for Supply Management’s manufacturing index slid to 48.3 in February, the group reported. Any number below 50 indicates that the factory sector is contracting.

“We think we’re in recession,” said Brian Bethune, an economist at forecasting firm Global Insight. “When you combine the situation in manufacturing with the construction declines -- together, they are significant enough to generate a recessionary cycle.”

Wall Street had a muted reaction, with the Dow Jones industrials edging down 7.49 points, or 0.1%, to 12,258.90.

The declines were consistent with a recession, but Joel Naroff of Naroff Economic Advisors said consumers and businesses shouldn’t waste too much time worrying about whether one was already underway.

“We’re bouncing along the bottom. It almost doesn’t matter where we are right now because it feels like a recession to households and businesses,” Naroff said. “We’re in for at least another three to six months of really slow growth, if there’s any growth at all.”

The construction industry accounts for about 9% of gross domestic product, but its effects are widely felt in the economy because related manufacturing sectors such as appliances and furniture depend heavily on it.

Kenneth Simonson, chief economist for the Associated General Contractors of America, said 2008 was likely to be significantly worse for the construction industry than 2007.

“I think you’ll see much grimmer figures this year,” he said. The brightest parts of the industry will be large projects such as power plants, refineries, cellphone towers and hospital and university buildings, he predicted.

The manufacturing index, based on a survey of purchasing managers, has been hovering around 50 as declining domestic demand for U.S.-made goods has been offset by strong foreign demand, economists said. However, the February decline suggested that domestic spending had slowed enough that exports, fueled by the dollar’s declining value, could no longer keep up.

“The economy has fewer safety valves,” said Kretzmer. “What’s left now is net exports. If consumer spending really turns down, we’ll be in recession.”

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maura.reynolds@latimes.com