Construction sector continues to hold back economic recovery

residential construction

Construction spending is at historic lows, another consequence of a housing market that drags on economic recovery. Image: CC Garreth & MaryJ

For the past three months, construction spending — a key economic indicator — has been plummeting. The construction sector has gotten so weak that spending in February reached its lowest level since the fall of 1999. New home construction, dragged down by foreclosures and short sales, was even worse, dropping to the lowest level in recorded history.

Construction: February is the cruelest month

Builders broke ground on fewer homes, apartments and government projects in February than they have in more than a decade. Construction spending in February dropped 1.4 percent; it was the third straight month of decline. The seasonally adjusted annual rate of construction spending in February hit $760.8 billion, the weakest level since October of 1999. While other sectors of the U.S. economy have been showing signs of life, construction has been holding back a more robust economic recovery. Lingering effects of the recession, including depressed demand for commercial projects such as office buildings, hotels and shopping centers and tight lending standards, continue to cause problems for the construction sector. February construction activity fell to about half the $1.5 trillion level economists figure is needed for a healthy construction sector. It has been estimated that construction won’t recover from the housing bubble that triggered the recession for another four years.

New home construction burst along with housing bubble

Private residential construction fell 3.7 percent in February to an annualized rate of $228.5 billion. Single-family and multi-family construction both dropped due to a glut of unsold homes and record foreclosure levels. Until housing inventory can be cleared, new home construction will continue to languish. According to the National Association of Realtors, existing home sales fell about 3 percent in the last year, but new home sales have dropped 28 percent. In February alone, new home sales dropped 16.9 percent, from an annual rate of 301,000 to 250,000 — the lowest level since the government started tracking the numbers in 1963.

New home sales: no buyers, no builders

In the construction sector, new home sales drive the growth that affects the bottom line in GDP. But new home sales currently cost about 29 percent more on average than existing homes, about double what is considered normal, according to the National Association of Realtors. The existing home market continues to be devalued by foreclosures and short sales, which made up almost 40 percent of all home sales in February. Until the foreclosures on existing homes are cleared and the inventory of new homes falls, home builders have essentially taken a time-out. Before the recession, 80 percent of builders sought financing. According to the National Association of Home Builders, only 20 percent now are looking for construction loans.


Associated Press


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