Construction Spending Rose 0.7% in October

Thanks to an increase in residential building for the second straight month, U.S. construction spending rose a stronger-than-expected 0.7% in October. And September's construction spending gain was revised upward to 0.7%, slightly better than the initial 0.5% estimate. The measure fell 0.9% in August. A Bloomberg survey had expected construction spending to decline 0.4% in October.

On a year-over-year basis, construction spending totaled a seasonally adjusted annual rate of $802.3 billion, down 9.3% from a year ago. However, that's slightly better than September's 10.4% year-over-year decline. The Commerce Department's construction spending report provides the most comprehensive survey of both public and private sector building activity.

All the Qualifiers Apply

The big surprise in the October report concerned private construction, and within that category, residential construction, which includes single-family homes. The segment rose 2.5% -- its biggest gain in six months -- to a seasonally adjusted annual rate of $229.6 billion. Private nonresidential construction, which includes shopping malls and office buildings, fell 0.7% to $252.2 billion. Overall, this translates into an 0.8% gain in private construction, or a $481.8 billion annual rate.

Public construction spending, which includes fiscal stimulus infrastructure projects, rose 0.4% in October to a seasonally adjusted annual rate of $320.5 billion. In that category, educational construction rose 1.7%, and highway construction increased 1.2%.

The October construction report is one in which all of the qualifiers apply. The monthly data are subject to revisions, and it marks only two months of residential construction increases, not nearly long enough to argue that a bottom is forming in private construction spending.

More than likely, given the large inventory of unsold single-family homes, and the drop in commercial building demand triggered by the loss of about 8 million jobs during the 2007-2009 recession, private construction will likely retrench in the months ahead. That means it won't contribute to U.S. GDP growth in early 2011, and perhaps for longer.

What would signal a turnaround in private construction? Strong, sustained job growth of more than 200,000 positions a month. That would provide additional signs of life in consumer spending and reduce the above-average commercial vacancy rates at malls and shopping centers around the U.S.