What Is Decline in Nonresidential Construction Telling Us?

Residential construction spending was higher in September than in August, which was itself higher than in July, which was itself higher than in June.

Interestingly, I predicted last December that the housing market would turn around in the summer of 2009. By now, we have seen enough housing price and construction data to see that prediction was correct.

My prediction was based on the assumption that a credit crunch would not be an housing important factor. In other words, I expected any significant credit market restraint of the housing market to cause the market to turn around later than summer 2009. That's not to say that credit is flowing easily -- just that credit conditions are reacting to the housing market (in particular, its new and lower levels of price and construction) rather than the other way around.

But look at nonresidential construction: it's fallen significantly since spring. Why?

• Credit crunch?
• housing construction crowding out non-residential construction?
• an expectation that labor will remain low for a while to come.

I am skeptical that a credit crunch is all that important -- certainly not the entire story (if it were, why did the housing market turn around as quickly as I predicted?). Housing construction right now is not significant enough to crowd out much non-residential construction. Thus, the bad news is that non-residential investment spending may be indicating more tough times for the labor market. I'm going to write more about that tomorrow on nytimes.com.

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Comments

[Carlos Lam:]

The author is correct that nonres construction has fallen. With the overleveraged consumer, government-created regime uncertainty, and inflationary-inducing fiscal and monetary policies, there's very little reason to start or expand a business.

The question I have is this: what will happen with res construction going forward. Again, given the debt that consumers have, I cannot imagine a return to the housing boom era. Indeed, if interest rates head higher, as I believe they must given the monetary policy pursued by the Fed, res construction will eventually fall as well.

Nov 04 06:06 AM

[LilBob:]

Non residential construction is in rapid decline because the whole country is overbuilt and current office and retail space inventories are already leasing at steep discounts. The only commercial construction that appears to be going on right now is for nationwide chains that are picking up real estate for new locations on the cheap and then building according to their company specific floorplans. A friend of mine is in construction and he was telling me that people are getting real stingy right now on office fit outs-frequently leaving the architects out entirely and asking office staff to just arrange the equipment around so it fits.

Nov 04 06:55 AM

[concrete guy:]

Lilbob has it right. Why build a new office when there is an approximate 20% vacancy rate in the existing inventory, and the open units can be leased at the lowest rates in 20 years. Nonres construction will continue to fall until we start to fill the glut of vacant commercial properties.

Nov 04 09:34 AM

[Gregman2:]

Also, the current character of much commercial build-out (that's vacant) is obsolete...it requires massive reconfig to adopt to the newer tech businesses that will revacate the new infrastructures.

Nov 04 09:09 PM