Ahead of the Bell: Construction Spending

AP News
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Posted: Nov 30, 2009 5:33 PM

Construction spending likely fell in October as a surge in housing activity slowed and nonresidential construction remained in the doldrums.

Economists surveyed by Thomson Reuters expect construction spending declined 0.5 percent in October following a 0.8 percent rise in September. The Commerce Department will release the new report at 10 a.m. EST.

In September, construction spending posted a better-than-expected performance, reflecting a 3.9 percent rise in residential construction, the biggest jump in housing activity since July 2003.

That surge, however, was the result of a rush by builders to get housing started and completed before the expiration of a tax credit of up to $8,000 offered by the government to first-time home buyers.

That tax credit had been scheduled to expire on Nov. 30, but President Barack Obama on Nov. 6 signed into law a measure that extends the tax credits for first-time home buyers, making it available through next June as long as a buyer signs a binding contract by the end of April. The program was also expanded to include a $6,500 credit for existing homeowners who buy a new place after living in their current residence for at least five years.

The housing industry had argued that the extension was needed to provide support for a fledgling economic recovery. The fear was that once the housing credit expired, home sales would again plummet, derailing the economy and sending the country back into recession.

Economists at JPMorgan Chase believe that housing activity dropped in October because of the uncertainty over whether the housing credit wold be extended.

These economists are also looking for a sixth consecutive decline in spending on nonresidential construction. This sector is being hurt by a credit squeeze as banks, struggling through the worst financial crisis since the 1930s, have tightened up loan standards in reaction to soaring loan defaults in the commercial sector.

The overall economy, as measured by the gross domestic product, expanded at an annual rate of 2.8 percent in the July-September quarter, weaker than the initial estimate of GDP growth of 3.5 percent during the third quarter. Still, it marked the first positive GDP growth following four consecutive quarterly declines as the country struggled with the deepest and longest recession since the 1930s.

The worry is that the fledgling recovery could falter, especially if consumers become more fearful about the future given that the unemployment rate, already at a 26-year high of 10.2 percent, is expected to keep rising until next summer.