Construction Spending Drop Worries Industry

Growth in manufacturing may have boosted the stock market today, but numbers out of the construction industry paint a more worrisome picture. Analysts said a drop in construction spending, also announced today, points to a still-struggling sector with few avenues for a quick rebound.

Construction spending in July declined to $805.2 billion, a ten-year low, the Census Bureau announced Wednesday. That's down from the June estimate of $813.1 billion and off more than 10 percent from July of last year. Experts say that construction spending, which boosted growth in the second quarter, could drag the economy down in the third quarter as it continues to lose momentum.

While the overall economy is improving and adding jobs most months, albeit slowly, the construction sector is an exception, said Ken Simonson, chief economist with the Associated General Contractors of America (AGC), an industry trade association. July construction employment fell by 11,000 jobs.

Public construction spending dropped 1.2 percent since June, a significant dip, the report said. Economists had expected that stimulus funding would bring an increase, but these numbers suggest that the impact of the stimulus has peaked.

The threat will expand over the next year as stimulus funding dries up in the first half of 2011. “Stimulus is having a limited benefit,” Simonson said. “I’m worried. There also hasn’t been an upturn in private spending.”

On top of that, Mike Zoller of Moody’s.com says state government budgets are not strong enough to compensate for this loss.

Construction and associated businesses were some of the hardest hit sectors by the recession, shedding 3 million of their 6.6 million jobs after the collapse of the housing bubble in 2006. Analysis from The Financial Times shows that 120,000 construction-related jobs were lost in the last three months alone. Construction employment declined in 276 out of 337 metropolitan areas between July 2009 and July 2010, according to a report by the AGC, suggesting a decline in demand for construction services. It is likely that more construction jobs will be shed in the coming months, said Anirban Basu, chief economist with the Associated Builders and Contractors (ABC), a construction trade organization. Many construction companies have been taking on jobs with no profit or even losses simply to keep their workers busy. “This can’t persist indefinitely,” Basu said. “Profitability will not return anytime soon so there will be a need to cut staff.”

Experts say that the renewable energy industry could bring growth in the private construction arena, but it still might not be enough to make up for the losses from the entire sector. “It can be lumpy at times but the trend is clear, the numbers will stay weak for the foreseeable future,” said Josh Shapiro, economist with MFR, an economics advising firm.

The markets largely overlooked these worries based on news of unexpected growth in U.S. manufacturing. The Institute for Supply Management's manufacturing index hit a three-month high, sending stocks surging and easing some fears about the weakening economy. That positive report comes after a series of weak indicators on the U.S. economy had investors worried that the recovery was losing steam.

But the construction spending report further confirms that the recovery is having trouble gaining traction and that job creation is far below the levels needed to bring down the unemployment rate, which stood at 9.5 percent in July. All eyes will be on the unemployment rate for August, which will be released Friday and which is expected to rise to 9.6 percent.