By Jim Haughey, Reed Construction Data July construction starts increased 3.2% from the previous month. This is approximately stable activity after discounting for the usual small seasonal gain and allowing for a cut in residential starts when the July estimate is released by the Census Bureau. The current residential estimate is the average of the last three months which is biased up by the homebuyer tax credit. Total construction starts have been relatively stable for the last three months but remain nearly 25% below the pre-recession peak level.
The expectations for an ugly summer for the economy are now being realized. Consumer income and spending growth have stalled as well as manufacturing production. Buying confidence appears to be weakening, although this has yet to be validated. This is due to the widespread realization that the massive federal fiscal stimulus, as huge as it was, was misdirected and not enough to overcome the markdown of assets stemming from the 2008 financial crisis. Plus there is the growing spending strike by many consumers and business managers concerned about the wave of new federal taxes and regulations that they see coming.
Spring GDP growth will be marked down to +1.0% to +1.5% from the initial +2.4%, with summer GDP growth rising to near +2.0%. The spring drop in GDP growth overstates the weakness in the economy because of timing issues with trade data. Hence, the growth pace will be stronger at year-end as the trade issue is reversed.
Growth of +2.5% to +3.0% will continue into 2011 but this is well short of the 3%-plus typical at the midpoint of an economic recovery. The Fed’s monetary policy remains unusually stimulative but there is little more the Federal Reserve Board can do with credit rates already near zero. Congress is now unwilling to maintain federal fiscal stimulus at the 2009 peak level. We have to wait for something to restore confidence.
As always, a slow economy has a magnified impact on capital goods industries such as construction. Reed Construction Data expects construction starts to be about steady for the rest of the year with a risk of some decline if spending confidence weakens further. Job-site construction spending will inch slightly lower through the summer and stabilize by year-end. Private work will expand slightly but will be offset by a decline in public work.