Summary
The latest data on construction spending for November confirms the contrasting stories between residential and non-residential construction. The theme of the November report is likely to be reflected throughout 2007-weak single family housing and stronger multifamily and non-residental construction.
Analysis
It is clear that the housing sector is the weak link in the construction industry. And, there are mixed signals as to how long it is going to take for the housing market to turn around. Certainly, the large homebuilders in particular are going through some tough times, but seem to be doing the smart thing in dramatically cutting back on their new home starts until the home inventory glut dissipates. Ironically, this may be a positive sign that could indeed shorten the length of the slump.
However, even with the much talked about housing woes, construction and building as a whole doesn’t appear to be in the midst of any dramatic cyclical downturn of the types seen in the 70’s, 80’s, and early 90’s. It appears that the various subsegments within the construction industry are following their own cycle, which in many cases is running counter cyclical to housing.
The commercial sector had been declining up until a couple of years ago when housing was booming. Now it appears that this sector is in the mid stages of an expansion. In some markets, office building and hotels are being built again, and in even more markets we are seeing the “light” commercial construction expanding rapidly (strip centers, light industrial, warehouses, etc). The latter seems to be benefiting from an economy that continues to be gently and gradually growing. Industrial construction also seems to be holding up reasonably well in most parts of the country (auto industry being an obvious exception) as the manufacturing sector has shown resilience in the current environment.
Last, but not least, the public infrastructure sector continues to be quote buoyant, and benefiting from the successive 6-year transportation funding bills (the most recent of which is referred to as SAFETEA-LU). Construction of highways, overpasses, bridges, schools, etc. are continuing at a strong pace and this sector consumes a significant amount of construction materials and employs large numbers of people.
In conclusion, the housing downturn is real and painful, but it may not lead to a widespread construction industry slump thanks to some good news in other sectors. The bigger headline might be the resilience of the U.S. economy rather than the slumping housing sector.
